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Testing For Cointegration Rank Using Bayes Factors

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  • Sugita, Katsuhiro

    (Department of Economics, University of Warwick)

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    Abstract

    This paper proposes Bayesian methods for estimating the cointegration rank using Bayes factors. We consider natural conjugate priors for computing Bayes factors. First, we estimate the cointegrating vectors for each possible rank. Then, we compute the Bayes factors for each rank against 0 rank. Monte Carlo simulations show that using Bayes factor with conjugate priors produces fairly good results. We apply the method to demand for money in the US.

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    File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp654.pdf
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    Bibliographic Info

    Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 654.

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    Length: 17 pages
    Date of creation: 2002
    Date of revision:
    Handle: RePEc:wrk:warwec:654

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    Related research

    Keywords: Cointegration ; MCMC ; Bayes factor;

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    References

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    1. Kleibergen, Frank & van Dijk, Herman K., 1994. "On the Shape of the Likelihood/Posterior in Cointegration Models," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 514-551, August.
    2. Phillips, Peter C B, 1996. "Econometric Model Determination," Econometrica, Econometric Society, vol. 64(4), pages 763-812, July.
    3. Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-39, November.
    4. BAUWENS, Luc & GIOT, Pierre, . "Gibbs sampling approach to cointegration," CORE Discussion Papers RP -1336, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. repec:cup:etheor:v:10:y:1994:i:3-4:p:514-51 is not listed on IDEAS
    6. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
    7. Geweke, John, 1996. "Bayesian reduced rank regression in econometrics," Journal of Econometrics, Elsevier, vol. 75(1), pages 121-146, November.
    8. Kleibergen, Frank & Paap, Richard, 2002. "Priors, posteriors and bayes factors for a Bayesian analysis of cointegration," Journal of Econometrics, Elsevier, vol. 111(2), pages 223-249, December.
    9. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139, September.
    10. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
    11. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
    12. Phillips, Peter C B & Ploberger, Werner, 1996. "An Asymptotic Theory of Bayesian Inference for Time Series," Econometrica, Econometric Society, vol. 64(2), pages 381-412, March.
    13. Evans, Michael & Swartz, Timothy, 2000. "Approximating Integrals via Monte Carlo and Deterministic Methods," OUP Catalogue, Oxford University Press, number 9780198502784, September.
    14. Johansen, S., 2000. "A Small Sample Correction of the Test for Cointegrating Rank in the Vector Autoregressive Model," Economics Working Papers eco2000/15, European University Institute.
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    Cited by:
    1. Gareth W. Peters & Balakrishnan Kannan & Ben Lasscock & Chris Mellen, 2010. "Model Selection and Adaptive Markov chain Monte Carlo for Bayesian Cointegrated VAR model," Papers 1004.3830, arXiv.org.

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