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Bayesian Inference in Cointegrated I (2) Systems: a Generalisation of the Triangular Model

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  • Rodney W. Strachan

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Abstract

This paper generalises the cointegrating model of Phillips (1991) to allow for I (0) , I (1) and I (2) processes. The model has a simple form that permits a wider range of I (2) processes than are usually considered, including a more flexible form of polynomial cointegration. Further, the specification relaxes restrictions identified by Phillips (1991) on the I (1) and I (2) cointegrating vectors and restrictions on how the stochastic trends enter the system. To date there has been little work on Bayesian I (2) analysis and so this paper attempts to address this gap in the literature. A method of Bayesian inference in potentially I (2) processes is presented with application to Australian money demand using a Jeffreys prior and a shrinkage prior.

Suggested Citation

  • Rodney W. Strachan, 2005. "Bayesian Inference in Cointegrated I (2) Systems: a Generalisation of the Triangular Model," Discussion Papers in Economics 05/14, Department of Economics, University of Leicester.
  • Handle: RePEc:lec:leecon:05/14
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    Cited by:

    1. Justyna Wróblewska, 2009. "Bayesian Model Selection in the Analysis of Cointegration," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 1(1), pages 57-69, March.
    2. Tsay, Ruey S. & Ando, Tomohiro, 2012. "Bayesian panel data analysis for exploring the impact of subprime financial crisis on the US stock market," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3345-3365.

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