Optimal Estimation of Cointegrated Systems with Irrelevant Instruments

By Peter C. B. Phillips. 2014

48 citations recorded by the source corpus.

It has been known since Phillips and Hansen (1990) that cointegrated systems can be consistently estimated using stochastic trend instruments that are independent of the system variables. A similar phenomenon occurs with deterministically trending instruments. The present work shows that such “irrelevant” deterministic trend instruments may be systematically used to produce asymptotically efficient estimates of a cointegrated system. The approach is convenient in practice, involves only linear instrumental variables estimation, and is a straightforward one step procedure with no loss of degrees of freedom in estimation. Simulations reveal that the procedure works well in practice both in terms of point and interval estimation, having little finite sample bias and less finite sample dispersion than other popular cointegrating regression procedures such as reduced rank VAR regression, fully modified least squares, and dynamic OLS. The procedure is a form of maximum likelihood estimation where the likelihood is constructed for data projected onto the trending instruments. This “trend likelihood” is related to the notion of the local Whittle likelihood but avoids frequency domain issues.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/15e66fd5b3daf58941d7652eb6cda5973d44698f

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

BUSINESS CYCLES, TREND ELIMINATION, AND THE HP FILTER (2020, methodology): “…the use of finite series representations in terms of deterministic functions for empirical trend modeling and low frequency projection methods in the work of Hwang and Sun (2018), Phillips (2001b, 2005a, 2005b, 2014), Müller (2007), Müller and Watson, 2018), Sun (2014), Yamada (2020) and others.”