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Maximum likelihood estimation of the multivariate fractional cointegrating model

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  • Lyhagen, Johan

    (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

Departures from an economic equilibrium should be mean reverting. The deviations are often assumed to be integrated of order zero but this is too restrictive. It is sufficient that the shocks are integrated of an order less than one, i.e. they may be fractionally integrated. A fractionally cointegrated system is developed. Further, estimation and testing are discussed, analytically and by Monte Carlo simulations. The Monte Carlo simulations shows that it is much more severe to ignore fractional cointegration than incorporating it when it is not present.

Suggested Citation

  • Lyhagen, Johan, 1998. "Maximum likelihood estimation of the multivariate fractional cointegrating model," SSE/EFI Working Paper Series in Economics and Finance 233, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0233
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    References listed on IDEAS

    as
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    2. Baillie, Richard T & Bollerslev, Tim, 1994. "Cointegration, Fractional Cointegration, and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 737-745, June.
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    4. Andersson, Michael K. & Gredenhoff, Mikael P., 1998. "Power and Bias of Likelihood Based Inference in the Cointegration Model under Fractional Cointegration," SSE/EFI Working Paper Series in Economics and Finance 221, Stockholm School of Economics.
    5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
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    7. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
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    Citations

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    Cited by:

    1. Lasak, Katarzyna, 2010. "Likelihood based testing for no fractional cointegration," Journal of Econometrics, Elsevier, vol. 158(1), pages 67-77, September.
    2. Kirstin Hubrich & Helmut Lutkepohl & Pentti Saikkonen, 2001. "A Review Of Systems Cointegration Tests," Econometric Reviews, Taylor & Francis Journals, vol. 20(3), pages 247-318.
    3. Simwaka, Kisu, 2012. "Time varying fractional cointegration," MPRA Paper 39505, University Library of Munich, Germany.
    4. Katarzyna Łasak & Carlos Velasco, 2015. "Fractional Cointegration Rank Estimation," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(2), pages 241-254, April.
    5. Katarzyna Lasak, 2008. "Maximum likelihood estimation of fractionally cointegrated systems," CREATES Research Papers 2008-53, Department of Economics and Business Economics, Aarhus University.

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    More about this item

    Keywords

    Fractional integration; Granger representation theorem; Likelihood ratio test; Monte Carlo.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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