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Nonparametric Cointegration Analysis of Fractional Systems With Unknown Integration Orders

Author

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  • Morten Ørregaard Nielsen

    (Queens University, Canada and CREATES, University of Aarhus, Denmark)

Abstract
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 specification 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 reflected 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 finite sample properties, even rivaling those of well-specified 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.

Suggested Citation

  • Morten Ørregaard Nielsen, 2009. "Nonparametric Cointegration Analysis of Fractional Systems With Unknown Integration Orders," CREATES Research Papers 2009-02, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2009-02
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cointegration rank; cointegration space; fractional integration and cointegration; interest rates; long memory; nonparametric; term structure; variance ratio;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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