Detecting Common Dynamics in Transitory Components
AbstractThis paper considers VAR/VECM models for variables exhibiting cointegration and common features in the transitory components. While the presence of cointegration reduces the rank of the long-run multiplier matrix, other types of common features lead to rank reduction in the short-run dynamics. These common transitory components arise when linear combination of the first differenced variables in a cointegrated VAR are white noise. This paper offers a reinterpretation of the traditional approach to testing for common feature dynamics, namely checking for a singular covariance matrix for the transitory components. Instead, the matrix of short-run coefficients becomes the focus of the testing procedure thus allowing a wide range of tests for reduced rank in parameter matrices to be potentially relevant tests of common transitory components. The performance of the different methods is illustrated in a Monte Carlo analysis which is then used to reexamine an existing empirical study. Finally, this approach is applied to analyze whether one would observe common dynamics in standard DSGE models.
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Bibliographic InfoPaper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 49.
Date of creation: 17 Nov 2009
Date of revision:
Transitory components; common features; reduced rank; cointegration.;
Other versions of this item:
- Christensen Timothy & Hurn Stan & Pagan Adrian, 2011. "Detecting Common Dynamics in Transitory Components," Journal of Time Series Econometrics, De Gruyter, vol. 3(1), pages 1-28, February.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-19 (All new papers)
- NEP-ECM-2009-12-19 (Econometrics)
- NEP-ETS-2009-12-19 (Econometric Time Series)
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- Hecq, Alain & Issler, João Victor, 2012.
"A Common-Feature Approach for Testing Present-Value Restrictions with Financial Data,"
Economics Working Papers (Ensaios Economicos da EPGE)
728, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Hecq Alain & Victor Issler João, 2012. "A Common-Feature Approach for Testing Present-Value Restrictions with Financial Data," Research Memoranda 006, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
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