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A Specification Search Algorithm for Cointegrated Systems

Author

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  • Jerzy Mycielski
  • Michal Kurcewicz

Abstract

A specification search algorithm is proposed that aims to assist the user in the process of constructing Vector Error Correction Models. The algorithm automates testing the cointegration rank of the system and performs simplifications based on possible weak exogeneity of some variables. Overidentification restrictions can be provided by the user or can be imposed by an expert system that is a part of the algorithm. That expert system is not general, but is specific to the analysed problem. As an illustration we present an expert system for money demand specifications - it attempts to impose various restrictions typically used in money demand studies. Combinations of individual restrictions are jointly tested by a procedure similar to Omtzigt's algorithm. The algorithm is evaluated in a series of Monte-Carlo experiments. Preliminary results show that algorithm works quite well, and the true data generation processes are often recovered by the algorithm. As an empirical illustration, an automated construction of money demand systems for Germany and Switzerland is presented. Results are compared with some earlier work on money demand for these countries. In both cases stable money demand functions are found, however specifications differ from those obtained by the original authors

Suggested Citation

  • Jerzy Mycielski & Michal Kurcewicz, 2004. "A Specification Search Algorithm for Cointegrated Systems," Computing in Economics and Finance 2004 321, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:321
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    Citations

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    Cited by:

    1. Castle Jennifer L. & Doornik Jurgen A & Hendry David F., 2011. "Evaluating Automatic Model Selection," Journal of Time Series Econometrics, De Gruyter, vol. 3(1), pages 1-33, February.
    2. David F. Hendry & Hans-Martin Krolzig, 2004. "We Ran One Regression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(5), pages 799-810, December.
    3. Castle, Jennifer L. & Doornik, Jurgen A. & Hendry, David F., 2012. "Model selection when there are multiple breaks," Journal of Econometrics, Elsevier, vol. 169(2), pages 239-246.
    4. David F. Hendry & Hans-Martin Krolzig, 2004. "We Ran One Regression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(5), pages 799-810, December.

    More about this item

    Keywords

    model selection; cointegration;

    JEL classification:

    • 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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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