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Mixed Causal-Noncausal Autoregressions: Bimodality Issues in Estimation and Unit Root Testing

Author

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  • Frédérique BEC

    () (CREST; Thema, University of Cergy-Pontoise.)

  • Heino BOHN NIELSEN

    () (Department of Economics, University of Copenhagen.)

  • Sarra SAÏDI

    () (Thema, University of Cergy-Pontoise.)

Abstract

This paper stresses the bimodality of the widely used Student's t likelihood function applied in modelling Mixed causal-noncausal AutoRegressions (MAR). It first shows that a local maximum is very often to be found in addition to the global Maximum Likelihood Estimator (MLE), and that standard estimation algorithms could end up in this local maximum. It then shows that the issue becomes more salient as the causal root of the process approaches unity from below. The consequences are important as the local maximum estimated roots are typically interchanged, attributing the noncausal one to the causal component and vice-versa, which severely changes the interpretation of the results. The properties of unit root tests based on this Student's t MLE of the backward root are obviously a ected as well. To circumvent this issues, this paper proposes an estimation strategy which i) increases noticeably the probability to end up in the global MLE and ii) retains the maximum relevant for the unit root test against a MAR stationary alternative. An application to Brent crude oil price illustrates the relevance of the proposed approach.

Suggested Citation

  • Frédérique BEC & Heino BOHN NIELSEN & Sarra SAÏDI, 2019. "Mixed Causal-Noncausal Autoregressions: Bimodality Issues in Estimation and Unit Root Testing," Working Papers 2019-09, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2019-09
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    References listed on IDEAS

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    1. Alain Hecq & Lenard Lieb & Sean Telg, 2016. "Identification of Mixed Causal-Noncausal Models in Finite Samples," Annals of Economics and Statistics, GENES, issue 123-124, pages 307-331.
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    4. Pentti Saikkonen & Rickard Sandberg, 2016. "Testing for a Unit Root in Noncausal Autoregressive Models," Journal of Time Series Analysis, Wiley Blackwell, vol. 37(1), pages 99-125, January.
    5. Fries, Sébastien & Zakoian, Jean-Michel, 2019. "Mixed Causal-Noncausal Ar Processes And The Modelling Of Explosive Bubbles," Econometric Theory, Cambridge University Press, vol. 35(6), pages 1234-1270, December.
    6. Gel, Yulia R. & Gastwirth, Joseph L., 2008. "A robust modification of the Jarque-Bera test of normality," Economics Letters, Elsevier, vol. 99(1), pages 30-32, April.
    7. Rongning Wu & Richard A. Davis, 2010. "Least absolute deviation estimation for general autoregressive moving average time‐series models," Journal of Time Series Analysis, Wiley Blackwell, vol. 31(2), pages 98-112, March.
    8. Henri Nyberg & Markku Lanne & Erkka Saarinen, 2012. "Does noncausality help in forecasting economic time series?," Economics Bulletin, AccessEcon, vol. 32(4), pages 2849-2859.
    9. Jian Huang & Yudi Pawitan, 2000. "Quasi‐likelihood Estimation of Non‐invertible Moving Average Processes," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 27(4), pages 689-702, December.
    10. Christian Gourieroux & Joann Jasiak, 2016. "Filtering, Prediction and Simulation Methods for Noncausal Processes," Journal of Time Series Analysis, Wiley Blackwell, vol. 37(3), pages 405-430, May.
    11. Breid, F. Jay & Davis, Richard A. & Lh, Keh-Shin & Rosenblatt, Murray, 1991. "Maximum likelihood estimation for noncausal autoregressive processes," Journal of Multivariate Analysis, Elsevier, vol. 36(2), pages 175-198, February.
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    Cited by:

    1. Alain Hecq & Elisa Voisin, 2019. "Predicting bubble bursts in oil prices during the COVID-19 pandemic with mixed causal-noncausal models," Papers 1911.10916, arXiv.org, revised Mar 2021.

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    More about this item

    Keywords

    Mixed autoregression; non-causal autoregression; maximum likelihood estimation; unit root test; Brent crude oil price.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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