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A Nonlinear IV Likelihood-Based Rank Test for Multivariate Time Series and Long Panels

A test for the rank of a vector error correction model (VECM) or panel VECM based on the well-known trace test is proposed. The proposed test employs instrumental variables (IV's) generated by a class of nonlinear functions of the estimated stochastic trends of the VECM under the null. The test improves the standard trace test by replacing the non-standard critical values with chi-squared critical values. Extending the result to the panel VECM case, the test is robust to cross-sectional correlation of the disturbances. With this test, I extend earlier research using nonlinear IV's for unit root testing. However, the optimal instrument in the univariate case is not admissable in the more general multivariate case. The chi-squared result suggests that IV tests may be used to replace limits of other standard tests with integrated time series that are given by nonstandard stochastic integrals, even without a panel with which to pool tests.

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File URL: http://economics.missouri.edu/working-papers/2010/WP1001_zmiller.pdf
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 1001.

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Length: 22 pgs.
Date of creation: 30 Jan 2010
Date of revision:
Publication status: Published in Journal of Time Series Econometrics 2010
Handle: RePEc:umc:wpaper:1001
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