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Likelihood Ratio Tests of Restrictions on Common Trends Loading Matrices in I(2) VAR Systems

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  • H. Peter Boswijk

    (Amsterdam School of Economics and Tinbergen Institute, University of Amsterdam, 1001 NJ Amsterdam, The Netherlands)

  • Paolo Paruolo

    (Joint Research Centre, European Commission, 21027 Ispra (VA), Italy)

Abstract

Likelihood ratio tests of over-identifying restrictions on the common trends loading matrices in I(2) VAR systems are discussed. It is shown how hypotheses on the common trends loading matrices can be translated into hypotheses on the cointegration parameters. Algorithms for (constrained) maximum likelihood estimation are presented, and asymptotic properties sketched. The techniques are illustrated using the analysis of the PPP and UIP between Switzerland and the US.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jecnmx:v:5:y:2017:i:3:p:28-:d:103006
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    Cited by:

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    2. Yuanyuan Li & Dietmar Bauer, 2020. "Modeling I(2) Processes Using Vector Autoregressions Where the Lag Length Increases with the Sample Size," Econometrics, MDPI, vol. 8(3), pages 1-28, September.
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