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Irrelevant variables in cointegration analysis

Irrelevant variables in cointegration analysis
Irrelevant variables in cointegration analysis
We investigate analytically and via Monte Carlo simulations the effects of the inclusion of irrelevant variables in the statistical model, on the cointegration analysis of Johansen (1988, 1991). We show that overspecifying the statistical model does not affect inference about the cointegrating rank, as Johansen (1996, p. 42) suggests. Estimators of the cointegrating vectors and adjustment coefficients remain consistent, but efficiency is affected for the cointegrating vectors. Simulations show that overspecifying the statistical model can considerably reduce the power of tests of cointegrating rank.
cointegration, misspecification, irrelevant variables, asymptotics, monte carlo
0966-4246
University of Southampton
Pashourtidou, Nicoletta
09599520-5807-4f62-8c9d-df34397c71d5
O'Brien, Raymond
6d46f2be-6f1d-4bcd-9b94-baedee23ff22
Pashourtidou, Nicoletta
09599520-5807-4f62-8c9d-df34397c71d5
O'Brien, Raymond
6d46f2be-6f1d-4bcd-9b94-baedee23ff22

Pashourtidou, Nicoletta and O'Brien, Raymond (2003) Irrelevant variables in cointegration analysis (Discussion Papers in Economics and Econometrics) Southampton, UK. University of Southampton 50pp.

Record type: Monograph (Discussion Paper)

Abstract

We investigate analytically and via Monte Carlo simulations the effects of the inclusion of irrelevant variables in the statistical model, on the cointegration analysis of Johansen (1988, 1991). We show that overspecifying the statistical model does not affect inference about the cointegrating rank, as Johansen (1996, p. 42) suggests. Estimators of the cointegrating vectors and adjustment coefficients remain consistent, but efficiency is affected for the cointegrating vectors. Simulations show that overspecifying the statistical model can considerably reduce the power of tests of cointegrating rank.

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Published date: 1 June 2003
Keywords: cointegration, misspecification, irrelevant variables, asymptotics, monte carlo

Identifiers

Local EPrints ID: 33493
URI: https://eprints.soton.ac.uk/id/eprint/33493
ISSN: 0966-4246
PURE UUID: 0fed51f1-1764-4715-b4b9-ee6d6fe16e34

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Date deposited: 18 May 2006
Last modified: 17 Jul 2017 15:52

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