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Comovements in Large Systems

  • GONZALO, Jesus

    (Department of Economics, Boston University)

  • PITARAKIS, Jean-Yves

    (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

In this paper we study various methods for detecting the co integrating rank as the number of variables gets large. We show that the use of standard tools will always lead to misleading inferences in such settings due to excessive size distortions. Particularly the LR test tends to produce too much cointegration. We introduce a new test statistic that displays excellent size properties in both small and large systems. In addition we propose a model selection procedure for selecting the cointegrating rank. A new criterion outperforms the standard information-theoretic criteria (AIC, BIC).

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1994065.

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Date of creation: 01 Nov 1994
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Handle: RePEc:cor:louvco:1994065
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  1. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  2. Hirotugu Akaike, 1987. "Factor analysis and AIC," Psychometrika, Springer;The Psychometric Society, vol. 52(3), pages 317-332, September.
  3. Izenman, Alan Julian, 1975. "Reduced-rank regression for the multivariate linear model," Journal of Multivariate Analysis, Elsevier, vol. 5(2), pages 248-264, June.
  4. Hannan, E. J., 1981. "Estimating the dimension of a linear system," Journal of Multivariate Analysis, Elsevier, vol. 11(4), pages 459-473, December.
  5. Brown, Bryan W, 1981. "Sample Size Requirements in Full Information Maximum Likelihood Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(2), pages 443-59, June.
  6. Zhao, L. C. & Krishnaiah, P. R. & Bai, Z. D., 1986. "On detection of the number of signals in presence of white noise," Journal of Multivariate Analysis, Elsevier, vol. 20(1), pages 1-25, October.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  9. Hirotugu Akaike, 1969. "Fitting autoregressive models for prediction," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 21(1), pages 243-247, December.
  10. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  11. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February.
  12. Hamparsum Bozdogan, 1987. "Model selection and Akaike's Information Criterion (AIC): The general theory and its analytical extensions," Psychometrika, Springer;The Psychometric Society, vol. 52(3), pages 345-370, September.
  13. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
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