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Kernel based inference in time varying coefficient cointegrating regression

Kernel based inference in time varying coefficient cointegrating regression
Kernel based inference in time varying coefficient cointegrating regression
This paper studies nonlinear cointegrating models with time-varying coefficients and multiple nonstationary regressors using classic kernel smoothing methods to estimate the coefficient functions. Extending earlier work on nonstationary kernel regression to take account of practical features of the data, we allow the regressors to be cointegrated and to embody a mixture of stochastic and deterministic trends, complications which result in asymptotic degeneracy of the kernel-weighted signal matrix. To address these complications new local and global rotation techniques are introduced to transform the covariate space to accommodate multiple scenarios of induced degeneracy. Under regularity conditions we derive asymptotic results that differ substantially from existing kernel regression asymptotics, leading to new limit theory under multiple convergence rates. For the practically important case of endogenous nonstationary regressors we propose a fully-modified kernel estimator whose limit distribution theory corresponds to the prototypical pure cointegration case (i.e., with exogenous covariates), thereby facilitating inference using a generalized Wald-type test statistic. These results substantially generalize econometric estimation and testing techniques in the cointegration literature to accommodate time variation and complications of co-moving regressors. Finally, Monte-Carlo simulation studies as well as an empirical illustration to aggregate US data on consumption, income, and interest rates are provided to illustrate the methodology and evaluate the numerical performance of the proposed methods in finite samples.
0304-4076
Li, Degui
e341f702-23cd-4c1a-91a8-3b7aa3dfda15
Phillips, Peter Charles Bonest
f67573a4-fc30-484c-ad74-4bbc797d7243
Gao, Jiti
fb907009-eef0-4e30-aca7-b484324f4955
Li, Degui
e341f702-23cd-4c1a-91a8-3b7aa3dfda15
Phillips, Peter Charles Bonest
f67573a4-fc30-484c-ad74-4bbc797d7243
Gao, Jiti
fb907009-eef0-4e30-aca7-b484324f4955

Li, Degui, Phillips, Peter Charles Bonest and Gao, Jiti (2019) Kernel based inference in time varying coefficient cointegrating regression. Journal of Econometrics. (In Press)

Record type: Article

Abstract

This paper studies nonlinear cointegrating models with time-varying coefficients and multiple nonstationary regressors using classic kernel smoothing methods to estimate the coefficient functions. Extending earlier work on nonstationary kernel regression to take account of practical features of the data, we allow the regressors to be cointegrated and to embody a mixture of stochastic and deterministic trends, complications which result in asymptotic degeneracy of the kernel-weighted signal matrix. To address these complications new local and global rotation techniques are introduced to transform the covariate space to accommodate multiple scenarios of induced degeneracy. Under regularity conditions we derive asymptotic results that differ substantially from existing kernel regression asymptotics, leading to new limit theory under multiple convergence rates. For the practically important case of endogenous nonstationary regressors we propose a fully-modified kernel estimator whose limit distribution theory corresponds to the prototypical pure cointegration case (i.e., with exogenous covariates), thereby facilitating inference using a generalized Wald-type test statistic. These results substantially generalize econometric estimation and testing techniques in the cointegration literature to accommodate time variation and complications of co-moving regressors. Finally, Monte-Carlo simulation studies as well as an empirical illustration to aggregate US data on consumption, income, and interest rates are provided to illustrate the methodology and evaluate the numerical performance of the proposed methods in finite samples.

Text
LPG-JE-2018-118-11-April-2019 - Accepted Manuscript
Restricted to Repository staff only until 16 October 2021.
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Accepted/In Press date: 16 October 2019

Identifiers

Local EPrints ID: 435264
URI: https://eprints.soton.ac.uk/id/eprint/435264
ISSN: 0304-4076
PURE UUID: dc2b1a50-f9ec-44b7-8d4d-7b794922928d
ORCID for Peter Charles Bonest Phillips: ORCID iD orcid.org/0000-0003-2341-0451

Catalogue record

Date deposited: 29 Oct 2019 17:30
Last modified: 30 Oct 2019 01:34

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