Functional Form Misspecification in Regressions with a Unit Root
AbstractWe examine the limit properties of the Non-linear Least Squares (NLS) estimator under functional form misspecification in regression models with a unit root. Our theoretical framework is the same as that of Park and Phillips, Econometrica 2001. We show that the limit behaviour of the NLS estimator is largely determined by the relative order of magnitude of the true and fitted models. If the estimated model is of different order of magnitude than the true model, the estimator converges to boundary points. When the pseudo-true value is on a boundary, standard methods for obtaining rates of convergence and limit distribution results are not applicable. We provide convergence rates and limit distribution results, when the pseudo-true value is an interior point. If functional form misspecification is committed in the presence of stochastic trends, the convergence rates can be slower and the limit distribution different than that obtained under correct specification.
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Bibliographic InfoPaper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 2-2008.
Length: 29 pages
Date of creation: Feb 2008
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-16 (All new papers)
- NEP-ECM-2008-02-16 (Econometrics)
- NEP-ETS-2008-02-16 (Econometric Time Series)
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