IV and GMM Estimation and Testing of Multivariate Stochastic Unit Root Models

Offer Lieberman and Peter Phillips
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Offer Lieberman: Bar-Ilan University

No 2061, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Lieberman and Phillips (2016; Journal of Econometrics; LP) introduced a multivariate stochastic unit root (STUR) model, which allows for random, time varying local departures from a unit root (UR) model, where nonlinear least squares (NLLS) may be used for estimation and inference on the STUR coefficient. In a structural version of this model where the driver variables of the STUR coefficient are endogenous, the NLLS estimate of the STUR parameter is inconsistent, as are the corresponding estimates of the associated covariance parameters. This paper develops a nonlinear instrumental variable (NLIV) as well as GMM estimators of the STUR parameter which conveniently addresses endogeneity. We derive the asymptotic distributions of the NLIV and GMM estimators and establish consistency under similar orthogonality and relevance conditions to those used in the linear model. An overidentification test and its asymptotic distribution are also developed. The results enable inference about structural STUR models and a mechanism for testing the local STUR model against a simple UR null, which complements usual UR tests. Simulations reveal that the asymptotic distributions of the the NLIV and GMM estimators of the STUR parameter as well as the test for overidentifying restrictions perform well in small samples and that the distribution of the NLIV estimator is heavily leptokurtic with a limit theory which has Cauchy-like tails. Comparisons of STUR coefficient and a standard UR coefficient test show that the one-sided UR test performs poorly against the one-sided STUR coefficient test both as the sample size and departures from the null rise.

Keywords: Autoregression, Diffusion; Similarity, Stochastic unit root, Time-varying coefficients (search for similar items in EconPapers)
JEL-codes: C22 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-06
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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Published in Econometric Theory (October 2018), 34(5): 1065-1100

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