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A Nonlinear IV Likelihood-Based Rank Test for Multivariate Time Series and Long Panels

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  • Miller J. Isaac

    (University of Missouri)

Abstract

A test for the rank of a vector error correction model (VECM) or panel VECM based on the well-known trace test is proposed. The proposed test employs instrumental variables (IV's) generated by a class of nonlinear functions of the estimated stochastic trends of the VECM under the null. The test improves on the standard trace test by replacing the non-standard critical values with chi-squared critical values. Extending the result to the panel VECM case, the test is robust to cross-sectional correlation of the disturbances. The nonlinear IV rank test also extends earlier research on nonlinear IV unit root tests. However, the optimal instrument in the univariate case is not admissible in the more general multivariate case. The chi-squared result suggests that IV tests may be used to replace limits of other standard tests with integrated time series that are given by nonstandard stochastic integrals, even without a panel with which to pool test statistics.

Suggested Citation

  • Miller J. Isaac, 2010. "A Nonlinear IV Likelihood-Based Rank Test for Multivariate Time Series and Long Panels," Journal of Time Series Econometrics, De Gruyter, vol. 2(1), pages 1-38, September.
    • Handle: RePEc:bpj:jtsmet:v:2:y:2010:i:1:n:5
    DOI: 10.2202/1941-1928.1057
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    2. Antonia Arsova & Deniz Dilan Karaman Örsal, 2018. "Likelihood-based panel cointegration test in the presence of a linear time trend and cross-sectional dependence," Econometric Reviews, Taylor & Francis Journals, vol. 37(10), pages 1033-1050, November.
    3. Uwe Hassler & Mehdi Hosseinkouchack, 2016. "Panel Cointegration Testing in the Presence of Linear Time Trends," Econometrics, MDPI, vol. 4(4), pages 1-16, November.

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    More about this item

    Keywords

    VECM; panel VECM; cointegrating rank; trace test; nonlinear instruments;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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