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Cointegrating Polynomial Regressions

Author

Listed:
  • Hong, Seung Hyun

    (Korea Institute of Public Finance, Seoul, Korea)

  • Wagner, Martin

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

Abstract

This paper develops a fully modified OLS estimator for cointegrating polynomial regressions, i.e. for regressions including deterministic variables, integrated processes and powers of integrated processes as explanatory variables and stationary errors. The errors are allowed to be serially correlated and the regressors are allowed to be endogenous. The paper thus extends the fully modified approach developed in Phillips and Hansen (1990). The FM-OLS estimator has a zero mean Gaussian mixture limiting distribution, which is the basis for standard asymptotic inference. In addition Wald and LM tests for specification as well as a KPSS-type test for cointegration are derived. The theoretical analysis is complemented by a simulation study which shows that the developed FM-OLS estimator and tests based upon it perform well in the sense that the performance advantages over OLS are by and large similar to the performance advantages of FM-OLS over OLS in cointegrating regressions.

Suggested Citation

  • Hong, Seung Hyun & Wagner, Martin, 2011. "Cointegrating Polynomial Regressions," Economics Series 264, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:264
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-264.pdf
    File Function: First version, 2011
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    References listed on IDEAS

    as
    1. Robert de Jong, 2004. "Nonlinear estimators with integrated regressors but without exogeneity," Econometric Society 2004 North American Winter Meetings 324, Econometric Society.
    2. Berenguer Rico, Vanessa & Gonzalo, Jesús, 2011. "Summability of stochastic processes: a generalization of integration and co-integration valid for non-linear processes," UC3M Working papers. Economics we1115, Universidad Carlos III de Madrid. Departamento de Economía.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Cointegrating polynomial regression; fully modified OLS estimation; integrated process; testing;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • 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

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