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A Bayesian Approach to Modelling Bivariate Time-Varying Cointegration and Cointegrating Rank

Author

Listed:
  • Chew Lian Chua

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Sarantis Tsiaplias

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

A bivariate model that allows for both a time-varying cointegrating matrix and time-varying cointegrating rank is presented. The model addresses the issue that, in real data, the validity of a constant cointegrating relationship may be questionable. The model nests the sub-models implied by alternative cointegrating matrix ranks and allows for transitions between stationarity and non-stationarity, and cointegrating and non-cointegrating relationships in accordance with the observed behaviour of the data. A Bayesian test of cointegration is also developed. The model is used to assess the validity of the Fisher effect and is also applied to equity market data.

Suggested Citation

  • Chew Lian Chua & Sarantis Tsiaplias, 2014. "A Bayesian Approach to Modelling Bivariate Time-Varying Cointegration and Cointegrating Rank," Melbourne Institute Working Paper Series wp2014n27, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2014n27
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    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2014n27.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Error correction models; singular value decomposition; cointegration tests;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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