Nonparametric Cointegration Analysis of Fractional Systems With Unknown Integration Orders

In this paper a nonparametric variance ratio testing approach is proposed for determining the cointegration rank in fractionally integrated systems. The test statistic is easily calculated without prior knowledge of the integration order of the data, the strength of the cointegrating relations, or the cointegration vector(s). The latter property makes it easier to implement than regression-based approaches, especially when examining relationships between several variables with possibly multiple cointegrating vectors. Since the test is nonparametric, it does not require the speci…cation of a particular model and is invariant to short-run dynamics. Nor does it require the choice of any smoothing parameters that change the test statistic without being re‡ected in the asymptotic distribution. Furthermore, a consistent estimator of the cointegration space can be obtained from the procedure. The asymptotic distribution theory for the proposed test is non-standard but easily tabulated or simulated. Monte Carlo simulations demonstrate excellent …nite sample properties, even rivaling those of well-speci…ed parametric tests. The proposed methodology is applied to the term structure of interest rates, where, contrary to both fractional and integer-based parametric approaches, evidence in favor of the expectations hypothesis is found using the nonparametric approach.


Issue Date:
2008-07
Publication Type:
Working or Discussion Paper
Record Identifier:
https://ageconsearch.umn.edu/record/273650
Language:
English
Total Pages:
38
JEL Codes:
C32
Series Statement:
Working Paper No. 1174




 Record created 2018-06-13, last modified 2018-06-14

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