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Maximum Likelihood Estimation of the I(2) Model under Linear Restrictions

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  • Jurgen A. Doornik

    (Department of Economics and Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, Oxford, OX1 3UQ, UK)

Abstract

Estimation of the I(2) cointegrated vector autoregressive (CVAR) model is considered. Without further restrictions, estimation of the I(1) model is by reduced-rank regression (Anderson (1951)). Maximum likelihood estimation of I(2) models, on the other hand, always requires iteration. This paper presents a new triangular representation of the I(2) model. This is the basis for a new estimation procedure of the unrestricted I(2) model, as well as the I(2) model with linear restrictions imposed.

Suggested Citation

  • Jurgen A. Doornik, 2017. "Maximum Likelihood Estimation of the I(2) Model under Linear Restrictions," Econometrics, MDPI, vol. 5(2), pages 1-20, May.
    • Handle: RePEc:gam:jecnmx:v:5:y:2017:i:2:p:19-:d:98597
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    Cited by:

    1. Jurgen A. Doornik & Rocco Mosconi & Paolo Paruolo, 2017. "Formula I(1) and I(2): Race Tracks for Likelihood Maximization Algorithms of I(1) and I(2) Cointegrated VAR Models," Econometrics, MDPI, vol. 5(4), pages 1-30, November.
    2. Katarina Juselius, 2017. "Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge," Econometrics, MDPI, vol. 5(3), pages 1-20, July.
    3. Kurita, Takamitsu, 2020. "Likelihood-based tests for parameter constancy in I(2) CVAR models with an application to fixed-term deposit data," Journal of Multivariate Analysis, Elsevier, vol. 178(C).
    4. Juselius, Katarina & Stillwagon, Josh R., 2018. "Are outcomes driving expectations or the other way around? An I(2) CVAR analysis of interest rate expectations in the dollar/pound market," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 93-105.
    5. H. Peter Boswijk & Paolo Paruolo, 2017. "Likelihood Ratio Tests of Restrictions on Common Trends Loading Matrices in I(2) VAR Systems," Econometrics, MDPI, vol. 5(3), pages 1-17, June.

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