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Multicointegration and present value relations

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  • Engsted, Tom
  • Gonzalo, Jesús
  • Haldrup, Niels

Abstract

It is well-known that if the forcing variable of a present value (PV) model is an integrated process, then the model will give rise to a particular cointegrating restriction. In this paper we demostrate that if the PV relation is exact, such that no additive error term appears in the specification, then te variables will be multicointegrated such that the cumlation of cointegration errors at one level of cointegration will cointegrate with the forcing variable. Multicointegration thus delivers a statistical property of the data that is necessary, though not sufficient, for this class of models to be valido Estimation and inference of the model are discussed and it is shown that, provided me PV relation is exact, the discount factor of the model can be estimated with arate of convergence that is faster than the usual super-consistent rate characterising estimators in the cointegration literature. Finally, the paper is completed with two empirical analyses of PV models using term structure data and farmland data, respectively.

Suggested Citation

  • Engsted, Tom & Gonzalo, Jesús & Haldrup, Niels, 1996. "Multicointegration and present value relations," DES - Working Papers. Statistics and Econometrics. WS 4540, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:4540
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    References listed on IDEAS

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    1. Engsted, Tom & Tanggaard, Carsten, 1995. "The Predictive Power of Yield Spreads for Future Interest Rates: Evidence from the Danish Term Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 145-159, March.
    2. John Campbell & Angus Deaton, 1989. "Why is Consumption So Smooth?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(3), pages 357-373.
    3. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 495-514.
    4. Marjorie Flavin, 1993. "The Excess Smoothness of Consumption: Identification and Interpretation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 651-666.
    5. Dolado, Juan & Galbraith, John W & Banerjee, Anindya, 1991. "Estimating Intertemporal Quadratic Adjustment Cost Models with Integrated Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 919-936, November.
    6. Haldrup, Niels, 1994. "The asymptotics of single-equation cointegration regressions with I(1) and I(2) variables," Journal of Econometrics, Elsevier, vol. 63(1), pages 153-181, July.
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    Present value relations;

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