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Cointegrated VARMA models and forecasting US interest rates

  • Christian Kascha
  • Carsten Trenkler

We bring together some recent advances in the literature on vector autoregressive moving-average models creating a relatively simple specification and estimation strategy for the cointegrated case. We show that in the cointegrated case with fixed initial values there exists a so-called final moving representation which is usually simpler but not as parsimonious than the usual Echelon form. Furthermore, we proof that our specification strategy is consistent also in the case of cointegrated series. In order to show the potential usefulness of the method, we apply it to US interest rates and find that it generates forecasts superior to methods which do not allow for moving-average terms.

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Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 033.

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Date of creation: Oct 2011
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Handle: RePEc:zur:econwp:033
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  1. Bent Nielsen, 2001. "Order determination in general vector autoregressions," Economics Papers 2001-W10, Economics Group, Nuffield College, University of Oxford.
  2. Athanasopoulos, George & Vahid, Farshid, 2008. "VARMA versus VAR for Macroeconomic Forecasting," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 237-252, April.
  3. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  4. Alain Monfort & Fulvio Pegoraro, 2007. "Switching VARMA Term Structure Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 5(1), pages 105-153.
  5. Kascha, Christian & Mertens, Karel, 2009. "Business cycle analysis and VARMA models," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 267-282, February.
  6. Dietmar Bauer & Martin Wagner, 2005. "Autoregressive Approximations of Multiple Frequency I(1) Processes," Economics Working Papers ECO2005/09, European University Institute.
  7. Michiel De Pooter & Francesco Ravazzolo & Dick van Dijk, 2010. "Term structure forecasting using macro factors and forecast combination," International Finance Discussion Papers 993, Board of Governors of the Federal Reserve System (U.S.).
  8. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  9. Carstensen, Kai, 2003. "Nonstationary term premia and cointegration of the term structure," Economics Letters, Elsevier, vol. 80(3), pages 409-413, September.
  10. Cavaliere, Giuseppe & Rahbek, Anders & Taylor, A.M. Robert, 2010. "Cointegration Rank Testing Under Conditional Heteroskedasticity," Econometric Theory, Cambridge University Press, vol. 26(06), pages 1719-1760, December.
  11. Poskitt, D.S., 2006. "On The Identification And Estimation Of Nonstationary And Cointegrated Armax Systems," Econometric Theory, Cambridge University Press, vol. 22(06), pages 1138-1175, December.
  12. Shea, Gary S, 1992. "Benchmarking the Expectations Hypothesis of the Interest-Rate Term Structure: An Analysis of Cointegration Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 347-66, July.
  13. Lutkepohl, Helmut, 1984. "Linear transformations of vector ARMA processes," Journal of Econometrics, Elsevier, vol. 26(3), pages 283-293, December.
  14. D.S. Poskitt, 2009. "Vector Autoregresive Moving Average Identification for Macroeconomic Modeling: Algorithms and Theory," Monash Econometrics and Business Statistics Working Papers 12/09, Monash University, Department of Econometrics and Business Statistics.
  15. Lutkepohl, Helmut & Claessen, Holger, 1997. "Analysis of cointegrated VARMA processes," Journal of Econometrics, Elsevier, vol. 80(2), pages 223-239, October.
  16. D. Poskitt & H. Lütkepohl, 1995. "Consistent Specification of Cointegrated Autoregressive Moving-Average Systems," SFB 373 Discussion Papers 1995,54, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  17. Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January.
  18. Poskitt, D. S., 2003. "On the specification of cointegrated autoregressive moving-average forecasting systems," International Journal of Forecasting, Elsevier, vol. 19(3), pages 503-519.
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