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Modelling systems with a mixture of I(d) and I(0) variables using the fractionally co-integrated VAR model

Author

Listed:
  • Yao, Xingzhi
  • Izzeldin, Marwan
  • Li, Zhenxiong

Abstract

We propose a filtration technique for making inference in systems with I(0) and I(d) variables using the fractionally co-integrated vector autoregressive (FCVAR) model with long memory in the co-integrating residuals. Superior predictions for the I(0) variable are demonstrated using simulations.

Suggested Citation

  • Yao, Xingzhi & Izzeldin, Marwan & Li, Zhenxiong, 2019. "Modelling systems with a mixture of I(d) and I(0) variables using the fractionally co-integrated VAR model," Economics Letters, Elsevier, vol. 181(C), pages 160-163.
    • Handle: RePEc:eee:ecolet:v:181:y:2019:i:c:p:160-163
    DOI: 10.1016/j.econlet.2019.05.031
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    References listed on IDEAS

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    1. Søren Johansen & Morten Ørregaard Nielsen, 2012. "Likelihood Inference for a Fractionally Cointegrated Vector Autoregressive Model," Econometrica, Econometric Society, vol. 80(6), pages 2667-2732, November.
    2. Søren Johansen & Morten Ørregaard Nielsen, 2019. "Nonstationary Cointegration in the Fractionally Cointegrated VAR Model," Journal of Time Series Analysis, Wiley Blackwell, vol. 40(4), pages 519-543, July.
    3. Bollerslev, Tim & Osterrieder, Daniela & Sizova, Natalia & Tauchen, George, 2013. "Risk and return: Long-run relations, fractional cointegration, and return predictability," Journal of Financial Economics, Elsevier, vol. 108(2), pages 409-424.
    4. Johansen, SØren, 2008. "A Representation Theory For A Class Of Vector Autoregressive Models For Fractional Processes," Econometric Theory, Cambridge University Press, vol. 24(3), pages 651-676, June.
    5. Chen, Cathy Yi-Hsuan & Chiang, Thomas C. & Härdle, Wolfgang Karl, 2018. "Downside risk and stock returns in the G7 countries: An empirical analysis of their long-run and short-run dynamics," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 21-32.
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    More about this item

    Keywords

    Long memory; Fractional co-integration; Model predictability;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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