Generalized Reduced Rank Regression

This paper generalizes the cointegrated vector autoregressive model of Johansen (1988) to allow for structural changes. Estimation under various hypotheses is made possible by a new estimation technique, that makes it simple to derive a number of interesting likelihood ratio tests. E.g., the test for m structural changes against m + k structural changes (occurring at fixed points in time), m ∈ N 0 , k ∈ N, and test of linear parameter restrictions when the null hypothesis allows for structural changes. The asymptotic distribution is χ 2 in both cases.The model is applied to US term structure data, and structural changes in September 1979 and October 1982 -points in time with large changes in the Fed's policy -are found to be significant. After accounting for these structural changes, I cannot, contrary to previous studies, reject the long-run implications of the expectations hypothesis.

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“…This technique is also applicable to estimation problems unrelated to structural changes, see P. R. Hansen (2000a) for several examples.…”

Section: Resultsmentioning

confidence: 99%

“…Estimation and inference under a weaker assumption than Assumption 1, including general forms of heteroskedasticity and autocorrelation, is treated in P. R. Hansen (2000a).…”

Section: The Cointegrated Vector Autoregressive Modelmentioning

confidence: 99%

Structural changes in the cointegrated vector autoregressive model

Hansen

2003

Journal of Econometrics

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148

141

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“…Instead, we propose using the switching method of Boswijk (1995). (This method was proposed in a more general setting by Hansen 2002.) It is possible to numerically maximize the likelihood, but this is probably more time consuming than the switching method when large N and p are considered, although Boswijk (1995) discussed an example when Newton-Raphson will reach optimum in one step and the switching converges slowly to optimum.…”

Section: Homogeneous Cointegrating Relationshipsmentioning

confidence: 99%

Inference in Panel Cointegration Models With Long Panels

Larsson

Lyhagen

2007

Journal of Business & Economic Statistics

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This article presents a general likelihood-based framework for inference in panel vector autoregressive (VAR) models with cointegration restrictions. The cointegrating relationships are restricted to each cross section while the rest of the model is unrestricted. The homogeneous restriction of common cointegrating space is also considered. Asymptotic distributions of parameter estimators and the test statistics for the cointegrating rank and the homogeneous restriction are derived. The asymptotic distribution for the cointegrating rank is shown to be the convolution of the standard distribution of the trace statistic and the χ 2 distribution. The homogeneous restriction test statistic is asymptotically χ 2 . A Monte Carlo simulation investigates the small-sample properties of the two tests. The empirical size of the test for the cointegrating rank is well above the nominal. A Bartlett-corrected test statistic is shown to have size very close to the nominal. We give an empirical example for a consumption model, including consumption, income, and inflation as well as considering the monetary exchange rate model of Groen and Kleibergen.

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“…We carry out the analysis in estimating the VEqCM with the help of Hansen's (2002) switching algorithm (see ). The cointegration rank is fixed to r = 2 and B and h 1 in the expression vec(β) = B ω+ h 1 are specified so as to identify a long run demand schedule for each industry.…”

Section: Empirical Illustration: a Labour Demand Modelmentioning

confidence: 99%

Dynamic adjustment cost models with forward‐looking behaviour

Fanelli

2006

The Econometrics Journal

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Summary In this paper we propose a new approach for dynamic decision problems where forward‐looking agents choose a set of non‐stationary variables subject to quadratic adjustment costs. It is assumed that expectations are computed by a cointegrated Vector Equilibrium Correction Model (VEqCM). The role of feedbacks from the decision to the explanatory variables on solution properties and modelling approach is discussed. We show that once the system of interrelated Euler equations stemming from the agent's optimization problem is embedded within the VEqCM, a switching algorithm based on Generalized Least Squares can be used to estimate and test the model. A labour demand model for two Danish manufacturing industries is investigated empirically.

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Generalized Reduced Rank Regression

Cited by 7 publications

References 36 publications

Structural changes in the cointegrated vector autoregressive model

Structural changes in the cointegrated vector autoregressive model

Inference in Panel Cointegration Models With Long Panels

Dynamic adjustment cost models with forward‐looking behaviour

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