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On determination of cointegration ranks

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  • Li, Qiaoling
  • Pan, Jiazhu
  • Yao, Qiwei

Abstract

We propose a new method to determine the cointegration rank in the error correction model of Engle and Granger (1987). To this end, we first estimate the cointegration vectors in terms of a residual-based principal component analysis. Then the cointegration rank, together with the lag order, is determined by a penalized goodness-of-fit measure. We have shown that the estimated cointegration vectors are asymptotically normal, and our estimation for the cointegration rank is consistent. Our approach is more robust than the conventional likelihood based methods, as we do not impose any assumption on the form of the error distribution in the model, and furthermore we allow the serial dependence in the error sequence. The proposed methodology is illustrated with both simulated and real data examples. The advantage of the new method is particularly pronounced in the simulation with non-Gaussian and/or serially dependent errors.

Suggested Citation

  • Li, Qiaoling & Pan, Jiazhu & Yao, Qiwei, 2009. "On determination of cointegration ranks," LSE Research Online Documents on Economics 24106, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24106
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    File URL: http://eprints.lse.ac.uk/24106/
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    References listed on IDEAS

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    Cited by:

    1. Abry, Patrice & Didier, Gustavo, 2018. "Wavelet eigenvalue regression for n-variate operator fractional Brownian motion," Journal of Multivariate Analysis, Elsevier, vol. 168(C), pages 75-104.
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    3. Patrice Abry & B. Cooper Boniece & Gustavo Didier & Herwig Wendt, 2023. "Wavelet eigenvalue regression in high dimensions," Statistical Inference for Stochastic Processes, Springer, vol. 26(1), pages 1-32, April.
    4. Pillay, Timesh D. & Skordis-Worrall, Jolene, 2013. "South African health financing reform 2000–2010: Understanding the agenda-setting process," Health Policy, Elsevier, vol. 109(3), pages 321-331.

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    More about this item

    Keywords

    cointegration; error correction models; penalized goodness-of-fit criteria; model selection.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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