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Time-Varying Vector Error-Correction Models: Estimation and Inference

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  • Jiti Gao
  • Bin Peng
  • Yayi Yan

Abstract

This paper considers a time-varying vector error-correction model that allows for different time series behaviours (e.g., unit-root and locally stationary processes) to interact with each other to co-exist. From practical perspectives, this framework can be used to estimate shifts in the predictability of non-stationary variables, test whether economic theories hold periodically, etc. We first develop a time-varying Granger Representation Theorem, which facilitates the establishment of asymptotic properties for the model, and then propose estimation and inferential methods and theory for both short-run and long-run coefficients. We also propose an information criterion to estimate the lag length, a singular-value ratio test to determine the cointegration rank, and a hypothesis test to examine the parameter stability. To validate the theoretical findings, we conduct extensive simulations. Finally, we demonstrate the empirical relevance by applying the framework to investigate the rational expectations hypothesis of the U.S. term structure.

Suggested Citation

  • Jiti Gao & Bin Peng & Yayi Yan, 2023. "Time-Varying Vector Error-Correction Models: Estimation and Inference," Papers 2305.17829, arXiv.org.
  • Handle: RePEc:arx:papers:2305.17829
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    References listed on IDEAS

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    1. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
    2. Dimitri Vayanos & Jean‐Luc Vila, 2021. "A Preferred‐Habitat Model of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 89(1), pages 77-112, January.
    3. Bergamelli, Michele & Bianchi, Annamaria & Khalaf, Lynda & Urga, Giovanni, 2019. "Combining p-values to test for multiple structural breaks in cointegrated regressions," Journal of Econometrics, Elsevier, vol. 211(2), pages 461-482.
    4. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall.
    5. Martin M Andreasen & Tom Engsted & Stig V Møller & Magnus Sander & Stijn Van Nieuwerburgh, 2021. "The Yield Spread and Bond Return Predictability in Expansions and Recessions," The Review of Financial Studies, Society for Financial Studies, vol. 34(6), pages 2773-2812.
    6. Lionel Truquet, 2017. "Parameter stability and semiparametric inference in time varying auto-regressive conditional heteroscedasticity models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 79(5), pages 1391-1414, November.
    7. Dimitri Vayanos & Jean‐Luc Vila, 2023. "Corrigendum: A Preferred‐Habitat Model of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 91(3), pages 31-32, May.
    8. Dahlhaus, R., 1996. "On the Kullback-Leibler information divergence of locally stationary processes," Stochastic Processes and their Applications, Elsevier, vol. 62(1), pages 139-168, March.
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    10. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
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    Cited by:

    1. Panovska, Irina & Zhang, Licheng, 2024. "Jobless recoveries and time variation in labor markets," Journal of Macroeconomics, Elsevier, vol. 81(C).

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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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