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Two-Step Estimation of the Nonlinear Autoregressive Distributed Lag Model

Author

Listed:
  • Jin Seo Cho

    (Yonsei Univ)

  • Matthew Greenwood-Nimmo

    (Univ of Melbourne)

  • Yongcheol Shin

    (Univ of York)

Abstract

We consider estimation of and inference on the nonlinear autoregressive distributed lag (NARDL) model, which is a single-equation error correction model that allows for asymmetry with respect to positive and negative changes in the explanatory variable(s). We show that the NARDL model exhibits an asymptotic singularity issue that frustrates efforts to derive the asymptotic properties of the single-step estimator. Consequently, we propose a two-step estimation framework, in which the parameters of the long-run relationship are estimated first using the fully-modified least squares estimator before the dynamic parameters are estimated by OLS in the second step. We show that our two-step estimators are consistent for the parameters of the NARDL model and we derive their limit distributions. We also develop Wald test statistics for the hypotheses of short-run and long-run parameter asymmetry. We demonstrate the utility of our framework with an application to postwar dividend-smoothing in the U.S.

Suggested Citation

  • Jin Seo Cho & Matthew Greenwood-Nimmo & Yongcheol Shin, 2019. "Two-Step Estimation of the Nonlinear Autoregressive Distributed Lag Model," Working papers 2019rwp-154, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2019rwp-154
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    Citations

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    Cited by:

    1. Jin Seo Cho & Matthew Greenwood‐Nimmo & Yongcheol Shin, 2023. "Recent developments of the autoregressive distributed lag modelling framework," Journal of Economic Surveys, Wiley Blackwell, vol. 37(1), pages 7-32, February.
    2. Kashif Islam & Ahmad Raza Bilal & Zeeshan Saeed & Samina Sardar & Muhammad Husnain Kamboh, 2023. "Impact of government integrity and corruption on sustainable stock market development: linear and nonlinear evidence from Pakistan," Economic Change and Restructuring, Springer, vol. 56(4), pages 2529-2556, August.

    More about this item

    Keywords

    Nonlinear Autoregressive Distributed Lag (NARDL) Model; Fully-Modified Least Squares Estimator; Two-Step Estimation; Wald Test Statistic; Dividend-Smoothing.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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