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Estimation of common long-memory components in cointegrated systems

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URI: https://hdl.handle.net/10016/744
ISSN: 0735-0015
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cointegrated-systems-JBE-1995.pdf (529.5 KB)
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1995-01
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American Statistical Association
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Abstract
The analysis of cointegration in large systems requires a reduction of their dimensionality. To achieve this, an analysis proposes to obtain the integrated of order one - I(1) - factors in every subsystem and then analyze cointegration among them. A new way of estimating common long-memory components of a cointegrated system is proposed. The identification of these I(1) common factors is achieved by imposing that they be linear combinations of the original variables and that the error-correction terms do not cause the common factors at low frequencies. Estimation is done from a fully specified error-correction model, which makes it possible to test hypotheses on the common factors using standard chi-squared tests. Several empirical examples are presented to illustrate the procedure.
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Common factors, Cointegration, Error-correction model, Permanent-transitory decomposition
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Journal of Business & Economic Statistics, January 1995, vol. 13, nº 1, p. 27-35
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