Keywords: Cointegration, stochastic trends
Abstract: 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 orthogonal complements of the cointegrating
vectors and of the adjustment speeds are identified for a class of LR tests, including those developed in this
paper. It is shown how these tests can be interpreted as tests for restrictions on the orthogonal complements of the
cointegrating relationships and adjustment vectors, which allow one to combine and test for economically
meaningful restrictions on cointegrating relationships and on common stochastic trends.
Full paper (367 KB PDF)
| Full Paper (Screen Reader Version)
Home | FEDS | List of 2006 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: May 16, 2006