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Working Paper
Likelihood ratio tests on cointegrating vectors, disequilibrium adjustment vectors, and their orthogonal complements
Cointegration theory provides a flexible class of statistical models that combine long-run relationships and short-run dynamics. This paper presents three likelihood ratio (LR) tests for simultaneously testing restrictions on cointegrating relationships and on how quickly the system reacts to the deviation from equilibrium implied by the cointegrating relationships. Both the orthogonal complements of the cointegrating vectors and of the vectors of adjustment speeds have been used to define the common stochastic trends of a nonstationary system. The restrictions implicitly placed on the ...
Working Paper
Maximum-likelihood estimation of fractional cointegration with application to the short end of the yield curve
We estimate a multivariate autoregressive fractionally-integrated moving-average (ARFIMA) model to illustrate a cointegration testing methodology based on joint estimates of the fractional orders of integration of a cointegrating vector and its parent series. Although previous work has recognized that deviations from long-run relationships could exhibit long memory and go undetected in traditional 1(1)/i (0) cointegration analysis, previous tests for fractional cointegration relied on a two-step testing procedure and maintained the assumption in the second step that the parent series were ...
Working Paper
Dynamic Econometrics in Action: A Biography of David F. Hendry
David Hendry has made–and continues to make–pivotal contributions to the econometrics of empirical economic modeling, economic forecasting, econometrics software, substantive empirical economic model design, and economic policy. This paper reviews his contributions by topic, emphasizing the overlaps between different strands in his research and the importance of real-world problems in motivating that research.
Working Paper
Testing the expectations hypothesis when interest rates are near integrated
Nominal interest rates are unlikely to be generated by unit-root processes. Using data on short and long interest rates from eight developed and six emerging economies, we test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated. If the null hypothesis of no cointegration is rejected, we then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis. The results show support for cointegration in ten of the fourteen countries we consider, and the cointegrating vector is ...
Working Paper
Distributions of error correction tests for cointegration
This paper provides cumulative distribution functions, densities, and finite sample critical values for the single-equation error correction statistic for testing cointegration. Graphs and response surfaces summarize extensive Monte Carlo simulations and highlight simple dependencies of the statistic's quantiles on the number of variables in the error correction model, the choice of deterministic components, and the estimation sample size. The response surfaces provide a convenient way for calculating finite sample critical values at standard levels; and a computer program, freely available ...
Working Paper
Stochastic trends and cointegration in the market for equities
We use a no-arbitrage, cost-of-carry pricing model to examine whether equity spot and futures markets are cointegrated. A stock index and its futures price should be cointegrated if the cost of carry is stationary. Otherwise, the appropriate cointegrating relationship is trivariate and includes the index, futures price, and cost of carry. We study the relationships among the Standard and Poor's 500 index, associated index futures price series, and interest rate for January 4, 1988, through June 30, 1995, and find that all three series are nonstationary. We further find that the index and ...
Report
International Evidence on Long-Run Money Demand
We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily ...
Report
Exchange rate cointegration across central bank regime shifts
Foreign exchange rates are examined using cointegration tests over various time periods linked to regime shifts in central bank behavior. The number of cointegrating vectors seems to vary across these regime changes within the foreign exchange market. For example, cointegration is not generally found prior to the Plaza Agreement of September 22, 1985, but it is present after that date. The significance of these changes is evaluated using a likelihood ratio procedure proposed by Quintos (1993). The changing nature of the cointegrating relationships indicate that certain aspects of central bank ...