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Cointegrated Dynamics for A Generalized Long Memory Process

Author

Listed:
  • Asai, M.
  • Peiris, S.
  • McAleer, M.J.
  • Allen, D.E.

Abstract

Recent developments in econometric methods enable estimation and testing of general long memory process, which include the general Gegenbauer process. This paper considers the error correction model for a vector general long memory process, which encompasses the vector autoregressive fractionally-integrated moving average and general Gegenbauer process. We modify the tests for unit roots and cointegration, based on the concept of heterogeneous autoregression. The Monte Carlo simulations show that the finite sample properties of the modified tests are satisfactory, while the conventional tests suffer from size distortion. Empirical results for interest rates series for the U.S.A. and Australia indicate that: (1) the modified unit root test detected unit roots for all series, (2) after differencing, all series favour the general Gegenbauer process, (3) the modified test for cointegration found only two cointegrating vectors, and (4) the zero interest rate policy in the U.S.A. has no effect on the cointegrating vector for the two countries

Suggested Citation

  • Asai, M. & Peiris, S. & McAleer, M.J. & Allen, D.E., 2018. "Cointegrated Dynamics for A Generalized Long Memory Process," Econometric Institute Research Papers EI 2018-32, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  • Handle: RePEc:ems:eureir:110018
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    File URL: https://repub.eur.nl/pub/110018/EI2018-32.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Long Memory Processes; Gegenbauer Process; Dickey-Fuller Tests; Cointegration; Differencing; Interest Rates;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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