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An Autoregressive Distributed Lag Modelling Approach To Cointegration Analysis
An Autoregressive Distributed Lag Modelling Approach To Cointegration Analysis
Modelling
Approach to Cointegration
Analysis
M. Hashem Pesaran
Trinity College, Cambridge, ngland
!ongcheol "hin
Department o# Applied conomics, $niversity o# Cambridge, ngland
%irst &ersion' %ebruary, ())*, +evised' ,anuary,
())-
Abstract
This paper e.amines the use o# autoregressive distributed lag /A+DL0 mod1
els #or the analysis o# long1run relations 2hen the underlying variables are 3/(0.
3t sho2s that a#ter appropriate augmentation o# the order o# the A+DL model,
the 4L" estimators o# the short1run parameters are
p
T 1consistent 2ith the as1
ymptotically singular covariance matri., and the A+DL1based estimators o# the
long1run coe5cients are super1consistent, and valid in#erences on the long1run pa1
rameters can be made using standard normal asymptotic theory. The paper also
e.amines the relationship bet2een the A+DL procedure and the #ully modi6ed
4L" approach o# Phillips and Hansen to estimation o# cointegrating relations, and
compares the small sample per#ormance o# these t2o approaches via Monte Carlo
e.periments. These results provide strong evidence in #avour o# a rehabilitation
o# the traditional A+DL approach to time series econometric modelling. The
A+DL approach has the additional advantage o# yielding consistent estimates o#
the long1run coe5cients that are asymptotically normal irrespective o# 2hether
the underlying regressors are 3/(0 or 3/70.
,L Classi6cations' C(8, C(9, C(*, C88.
:ey ;ords' Autoregressive distributed lag model, Cointegration, 3/(0 and 3/70
regressors, Model selection, Monte Carlo simulation.
This is a revised version o# a paper presented at the "ymposium at the Centennial o# +agnar
%risch, The <or2egian Academy o# "cience and Letters, 4slo, March 91*, ())*. ;e are grate#ul
to Peter =os2i>?, Clive @ranger, Alberto Holly, :yung "o 3m, =rendan McCabe, "teve "atchell,
+ichard "mith, +on "mith and an anonymous re#eree #or help#ul comments. Partial 6nancial
support #rom the "+C /@rant <o. +777899A7B0 and the 3saac <e2ton Trust o# Trinity
College, Cambridge is grate#ully ac?no2ledged.
( C
(. 3<T+4D$CT34<
conometric analysis o# long1run relations has been the #ocus o# much
theoreti1 cal and empirical research in economics. 3n the case 2here the
variables in the long1run relation o# interest are trend stationary, the general
practice has been to de1trend the series and to model the de1trended series as
stationary distributed lag or autoregressive distributed lag /A+DL0 models.
stimation and in#erence concerning the long1run properties o# the model are
then carried out using stan1 dard asymptotic normal theory. /%or a
comprehensive revie2 o# this literature see Hendry, Pagan and "argan /()BD0
and ;ic?ens and =reusch /()BB00. The analysis becomes more complicated
2hen the variables are dierence1stationary, or integrated o# order ( /3/(0 #or
short0. The recent literature on cointegration is concerned 2ith the analysis o#
the long run relations bet2een 3/(0 variables, and its basic premise is, at least
implicitly, that in the presence o# 3/(0 variables the traditional A+DL approach
is no longer applicable. ConseEuently, a large number o# alternative estimation
and hypothesis testing procedures have been speci6cally developed #or the
analysis o# 3/(0 variables. /"ee the pioneering 2or? o# ngle and @ranger /()B-0,
,ohansen /())(0, Phillips /())(0, Phillips and Hansen /())70 and Phillips and
Loretan /())(0.0
3n this paper 2e re1e.amine the use o# the traditional A+DL approach #or the
analysis o# long run relations 2hen the underlying variables are 3/(0. ;e consider
the #ollo2ing general A+DL/pF E0 model'
p
y
t
G H
7
I H
(
t I
J
K
i
y
t
i
I L
7
.
EC(
I
J
L
7
5. I u F /(.(0
C
iG(
t
i
iG7
tCi t
5.
t
G P
(
5.
tC(
I P
8
5.
tC8
I 5 5 5 I P
s
5.
tCs
I M
t
F /(.80
2here .
t
is the ?1dimensional 3/(0 variables that are not cointegrated among
themselves, u
t
and M
t
are serially uncorrelated disturbances 2ith Nero means and
constant variance1covariances, and P
i
are ? O ? coe5cient matrices such that
the vector autoregressive process in 5.
t
is stable. ;e also assume that the
roots o#
P
p
iG(
K
i
N
i
G 7 all #all outside the unit circle and there e.ists a stable uniEue
long1run relationship bet2een y
t
and .
t
.
;e consider the problem o# consistent estimation o# the parameters o# the
A+DL model both 2hen u
t
and M
t
are uncorrelated, and 2hen they are corre1
lated. 3n the #ormer case 2e 2ill sho2 that the 4L" estimators o# the short1
run
parameters, H
7
, H
(
, L, L
F '''F
L
i
G 7 #or i W E, and P
i
G 7 #or i W s. 3n
this augmented speci6cation V
t
and M
t
are uncorrelated and the results stated
above 2ill be directly applicable to the 4L" estimators o# the short1run and
long1run parameters o# /(.90. 4nce again traditional methods o# estimation and
in#erence, originally developed #or trend1stationary variables, are applicable to
6rst1dierence stationary variables. The estimation o# the short1run eects still
reEuires an e.plicit modelling o# the contemporaneous dependence bet2een u
t
and M
t
. 3n practice, an appropriate choice o# the order o# the A+DL model is
crucial #or valid in#erence. =ut once this is done, estimation o# the long1run
parameters and computation o# valid standard errors #or the resultant
estimators can be carried out either by the 4L" method, using the so1called
XdeltaY method /51method0 to compute the standard errors, or by the
=e2elyZs /()-)0 regression approach. These t2o procedures yield identical
results and a choice bet2een them is only a matter o# computational
convenience.
The use o# the A+DL estimation procedure is directly comparable to the
semi1 parametric, #ully1modi6ed 4L" approach o# Phillips and Hansen /())70
to esti1 mation o# cointegrating relations. 3n the static #ormulation o# the
cointegrating regression,
y
t
G [ I Rt I S
7
.
t
I v
t
F /(.D0
P8Q
t
2here 5.
t
G e
t
, and \
t
G /v
t
F e
7
0
7
#ollo2s a general linear stationary process, the
9
4L" estimators o# R and S are T
8
1 and T 1consistent, but in general the asymp1
totic distribution o# the 4L" estimator o# S involves the unit1root
distribution as 2ell as the second1order bias in the presence o# the
contemporaneous correla1 tions that may e.ist bet2een v
t
and e
t
. There#ore, the
6nite sample per#ormance o# the 4L" estimator is poor and in addition, due
to the nuisance parameter dependencies, in#erence on S using the usual t1
tests in the 4L" regression o# /(.D0 is invalid. To overcome these problems
Phillips and Hansen /())70 have suggested the #ully1modi6ed 4L" estimation
procedure that asymptotically ta?es account o# these correlations in a semi1
parametric manner, in the sense that the #ully1modi6ed estimators have the
@aussian mi.ture normal distribution asymp1 totically, and in#erences on the long
run parameters using the t1test based on the limiting distribution o# the #ully1
modi6ed estimator is valid.
The A+DL1based approach to estimation and in#erence, and the #ully1modi6ed
4L" procedure are both asymptotically valid 2hen the regressors are 3/(0, and a
choice bet2een them has to be made on the basis o# their small sample properties
and computational convenience. To e.amine the small sample per#ormance o# the
t2o estimators 2e have carried out a number o# Monte Carlo e.periments.
"ince in practice the XtrueY orders o# the A+DL/pF m0 model are rarely ?no2n a
priori, in the Monte Carlo e.periments 2e also consider a t2o1step strategy
2hereby p and m are 6rst selected /estimated0 using either the A?ai?e
3n#ormation Criterion /A3C0, or the "ch2arN =ayesian Criterion /"C0, and then
the long1run coe5cients and their standard errors are estimated using the
A+DL model selected in the
6rst step. ;e re#er to these estimators as A+DL1A3C and A+DL1"C. The main
6ndings #rom these e.periments are as
#ollo2s'
/i0 The A+DL1A3C and the A+DL1"C estimators have very similar small1sample
per#ormances, 2ith the A+DL1"C per#orming slightly better in the ma>ority
o# the e.periments. This may re]ect the #act that the "ch2artN criterion
is a consistent model selection criterion 2hile A?ai?e is not.
/ii0 The A+DL test statistics that are computed using the 51method /or eEuiv1
alently by means o# the so1called =e2leyZs regression0, generally per#orm
much better in small samples than the test statistics computed using
the asymptotic #ormula that e.plicitly ta?es account o# the #act that the
regres1 sors are 3/(0.
/iii0 The A+DL1"C procedure 2hen combined 2ith the 51method o# comput1
ing the standard errors o# the long1run parameters generally dominates the
Phillips1Hansen estimator in small samples. This is in particular true o# the
siNe1po2er per#ormance o# the tests on the long1run parameter.
P9Q
u
/iv0 The Monte Carlo results point strongly in #avor o# the t2o1step estimation
procedure, and this strategy seems to 2or? even 2hen the model under con1
sideration has endogenous regressors, irrespective o# 2hether the regressors
are 3/(0 or 3/70.
(
The plan o# the paper is as #ollo2s' "ection 8 e.amines the asymptotic prop1
erties o# the 4L" estimators in the conte.t o# a simple autoregressive model 2ith
a linear deterministic trend and the ?1dimensional strictly e.ogenous 3/(0 regres1
sors. "ection 9 considers a more general A+DL model, allo2ing #or residual serial
correlations and possible endogeneity o# the 3/(0 regressors, and develops the re1
sultant asymptotic theory. 3n "ection D the A+DL1based approach is compared
to the cointegration1based approach o# Phillips and Hansen /())70. "ection *
reports and discusses the results o# Monte Carlo e.periments. "ome concluding
remar?s are presented in "ection A. Mathematical proo#s are provided in an
Appendi..
8. The Lagged Dependent &ariable Model 2ith the
Deter1 ministic Trend and .ogenous 3/(0 +egressors
3nitially 2e consider the simple A+DL/(,70 model containing 3/(0 regressors and
a linear deterministic trend,
K/L0y
t
G H
7
I H
(
t I L
7
.
t
I u
t
F t G (F '''F T F /8.(0
2here y
t
is a scalar, K/L0 G ( C KL, 2ith L being the one period lag operator, .
t
is a ? O ( vector o# regressors assumed to be integrated o# order ('
8
.
t
G .
tC(
I e
t
F /8.80
and L is a ? O ( vector o# un?no2n parameters. "uppose that the #ollo2ing
assumptions hold'
/A(0 The scalar disturbance term, u
t
, in /8.(0 is iid/7F ^
8
0,
(
The case 2here the regressors are 3/(0 and cointegrated among themselves presents ad1
ditional identi6cation problems and is best analyNed in the conte.t o# a system o# long1run
structural eEuations. 4n this see Pesaran and "hin /())*0.
8
"peci6cations /8.(0 and /8.80 can easily be adapted to allo2 #or inclusion o# a dri#t term in
the .
t
process. Consider, #or e.ample, the process 5.
t
G [
.
I e
t
F and note that it can also be
2ritten as .
t
G [
.
t I ._
t
, 2here 5._
t
G e
t
' There#ore, substituting .
t
in /8.(0 2e have
K/L0y
t
G H
7
I /H
(
I L
7
[
.
0t I L
7
._
t
I
u
t
F
2here ._
t
#ollo2s an 3/(0 process 2ithout a dri#t.
PDQ
C t t
`
C
/A80 The ?1dimensional vector, e
t
, in /8.80 has a general linear multivariate
stationary process,
/A90 u
t
and e
t
are uncorrelated #or all leads and lags such that .
t
is strictly
e.ogenous 2ith respect to u
t
,
/AD0 The 3/(0 regressors, .
t
, are not cointegrated among themselves, and
/A*0 >K> a (, so that the model is dynamically stable, and a long1run relationship
bet2een y
t
and .
t
e.ists.
9
;e shall distinguish bet2een t2o types o# parameters, the parameters
capturing the short1run dynamics /H
7
F H
(
F L and K0, and the long run
parameters on the trended regressors, t and .
t
, de6ned by
R G
H
(
( C K
F S G
L
( C
K
' /8.90
Applying the decomposition ( C KL G /( C K0 I K/( C L0 to /8.(0, y
t
can
be e.pressed as
2here
y
t
G [ I Rt I S
7
.
t
I v
t
F /8.D0
and
[ G
H
7
( C
K
(
S
K
b
RF
( C
K
(
v
t
G
J
K
i
u
t i
C K
J
K
i
S
7
e ' C
iG7 iG7
tCi
%rom /8.(0 and /8.D0 it is clear that y
t
and .
t
are individually 3/(0, but must be
cointegrated #or /8.(0 to be meaning#ul.
D
"imilarly, 2e obtain
y
tC(
G [
(
I Rt I S
7
.
t
I `
t
F /8.*0
2here [
(
G [ C R, `
t
G v
t (
C S
7
e , and ` is an 3/70 process 2ith variance ^
8
.
4ur main aim is to derive the asymptotic properties o# the 4L" estimators o#
the short1run as 2ell as the long1run parameters in the conte.t o# the A+DL/(,70
9
Tests o# the e.istence o# long1run relationships bet2een y
t
and .
t
, 2hen it is not ?no2n a
priori 2hether .
t
are 3/70 or 3/(0, are discussed in Pesaran, "hin and "mith /())A0.
D
A relationship bet2een 3/(0 variables is said to be Xstochastically cointegratedY i# it is trend
stationary, 2hile Xdeterministic cointegrationY re#ers to the case 2here the cointegrating relation
is level stationary. %or a discussion o# these t2o types o# cointegrating relations see Par? /())80.
P*Q
^
^
8
uT
/P
uT T
8
c
T
model, /8.(0. %or e.positional convenience, 2e trans#orm /8.(0 to the partitioned
regression model in the matri. #orm as,
y
T
G c
T
b I y
T C(
K I u
T
F /8.A0
2here y
T
G /y
(
F '''F y
T
0
7
, y
T C(
G /y
7
F '''F y
T C(
0
7
, d
T
G /(F '''F (0
7
, t
T
G /(F '''F T
0
7
, J
T
G /.
(
F '''F .
T
0
7
, c
T
G /d
T
F t
T
F J
T
0, u
T
G /u
(
F '''F u
T
0
7
, and b G /H
7
F H
(
F
L
7
0
7
. "ince our main interest is in the long1run coe5cients on trended regressors, t
and .
t
, 2e also partition
c
T
G /d
T
F "
T
0F "
T
G /t
T
F J
T
0F b G
S
H
7
c
b
F c G
S
H
(
b
F
L
2here the dimensions o# c
T
, "
T
, b and c are T O /? I 80, T O /? I (0, /? I 80 O
(
and /? I (0 O (, respectively.
Theorem 8.(. $nder the assumptions /A(0 1 A/*0, the 4L" estimators o# K and
c G /H
(
F L
7
0
7
in /8.A0, denoted by K
e
T
and ec
T
, respectively, are
p
T 1consistent,
and
have the #ollo2ing asymptotic distributions'
p
a
f
^
8
^
T /K
e
T
C K0 \
<
7F
u
`
F /8.-0
p
a
f
^
8
^
T /ec
T
C c0 \
<
7F
u
WW
7
`
F /8.B0
2here W G /RF S
7
0
7
is a /? I (0 O ( vector o# the long run parameters on trended
regressors, t and .
t
, and ran?/WW
7
0 G (. 3n addition, the 4L" estimator o#
H
7
in /8.A0, denoted by He
7T
, is also
p
T 1consistent, but has the mi.ture
normal
distribution. De6ning h G /b
7
F K0
7
and P
c
T
G /c
T
F y
T C(
0, and denoting the
4L"
estimator o# h by h
e
T
, the covariance matri. o# h
e
T
can be consistently
estimated
by
&
e
/h
e
T
0 G ^e
8 7
P
c
T
0
C(
F
2here
^e
8
G T
C(
/y
T
C
P
c
h
e
T
0
7
/y
T
C
P
c
T
h
e
T
0, and &
e
/h
e
T
0 is asymptotically
sin1
gular 2ith ran? eEual to 8.
Theorem 8.( sho2s that despite the presence o# stochastic and deterministic trends
in the A+DL model, the 4L" estimators o# the short1run parameters are
p
T 1 consistent.
*
The second and more important 6nding is that the 4L" estimators
*
"imilar results can also be obtained in the case o# regressors 2ith higher order trend terms
such as t
8
F t
9
F '''F or 3/80, 3/90, ..., variables.
PAQ
T
C W G
/( K 0
9
e
u
T
9
R
T
L
L
L
(
9
o# the coe5cients on the trended regressors, H
(
and L, in /8.(0 are asymptoti1
cally per#ectly collinear 2ith the 4L" estimator o# the coe5cient on the lagged
dependent variable, KF namely,
T
n o p
/ec
T
C c0 I
W/K
e
C K
0
G o
p
/(0' /8.)0
4ne interesting implication o# this result is that the t1statistics #or testing the
sig1 ni6cance o# individual impact coe5cients on the 3/(0 regressors are
asymptotically
A
eEuivalent, namely t
e
i
C t
L
e
>
G o
p
/(0 #or i G >, and
t
e
i
C t
He
(
G o
p
/(0.
%urthermore,
t
e
i
C t
/(CK
e
0
G o
p
/(0. +elation /8.)0 in con>unction
2ith
W
e
/ec
T
C c0 I W/K
e
T
C
K0
C
e
T
F /8.(70
also yields an important result #amiliar #rom the cointegration literature, 2hich
2e set out in the #ollo2ing theorem'
Theorem 8.8. $nder assumptions /A(0 1 /A*0, the A+DL1based estimators o#
the long1run parameters, given by
e
R
T
G He
(T
G/( C K
e
T
0, and S
e
T
G L
e
T
G/( C K
e
T
0, converge to their true values R and S, respectively, at the rates, T
8
and T . Also
9
asymptotically, T
8
/R
T
CR0 and T /S
e
T
CS0 have the /mi.ture0 normal
distributions,
and there#ore,
g
8 C(
e
a
f
^
8
^
"
_
T
D
"
T
/W
T
C W0 \
<
7F
/( C
3
?I(
K0
8
F /8.((0
2here W
e
T
G /
e
R
T
F S
e
7
0
7
,
g
_
G D
"
"
7
H
T
"
T
D
"
F "
T
G /t
T
F J
T
0, H
T
G 3
T
C
T "
T
T T T
( 7 C C(
d
T
/d
7
d
T
0
C
d
T
F and D
"
T
G Diag/T
8
F T 3
?
0'
The 6nding that the estimator o# S is T 1consistent is ?no2n as the Xsuper1
consistencyY property in the cointegration literature. "ince the limiting
distri1
butions o# T
8
/
e
R
T
C R0 and T /S
e
T
C S0 are /mi.ture0 normal, optimal t2o1
sided
in#erences concerning and S are possible. <otice also that the covariance matri.
o# the estimator o# W simply depends on the inverse o# the /scaled0 demeaned
data matri. and the spectral density at Nero #reEuency o# /( C KL0
C(
u
t
,
namely
^
8 8
u
G/( C K0 . 4nce again, this 6nding is in line 2ith the results already #amiliar
L
#rom the cointegration literature. /"ee "ection D #or #urther discussions.0
A
%or large enough T 2e have t
e
i
U /( C K0 /^
`
G^
u
0 ' This e.plains the relatively lo2 t1ratios
o#ten obtained #or short1run coe5cients in A+DL regressions 2ith 3/(0 variables, especially 2hen
K is close to unity.
P-Q
^
e
T
i
T ii
Hypothesis testing on the general linear restrictions involving the ? I ( di1
mensional long1run parameter vector, W, can be carried out in the usual manner.
Consider the g linear restrictions on W,
+W G rF
2here + is a g O /? I (0 matri. and r is a g O ( vector o# ?no2n constants. These
restrictions can be tested using the ;ald statistic,
C(
; G /+W
e
T
C r0
7
n
+Cov/W
e
T
0
+
7
o
/+W
e
T
C r0 /8.(80
G /+W
e
T
C
r0
7
/
/( C
K
e
T
8
uT
0
8
0
/"
7
H
T
"
T
0 /+W
e
T
C r0'
4# special interest is the t1statistic on the individual coe5cients given by
W
e
iT
C
W
i
t
i
G
se
i
F i G (F '''F ? I (F /8.(90
2here the standard error o# the i1th coe5cient is consistently estimated by
se
i
G
s
^e
8
uT
/"
7
H
T
"
T
0
C(
F
/( C K
e
T
0
8
and /"
7
H
T
"
T
0
C(
denotes the i1th diagonal element o# /"
7
H
T
"
T
0
C(
. =y Theorem
T ii T
8.8, the ;ald statistic in /8.(80 #ollo2s the asymptotic h
8
distribution 2ith g
degrees o# #reedom, and t
8
in /8.(90 is distributed asymptotically as a h
8
variate
2ith one degree o# #reedom.
3t is 2orth noting that the results in Theorem 8.8 eEually apply to the purely
autoregressive model 2ith deterministic trend,
y
t
G H
7
I H
(
t I Ky
tC(
I u
t
F t G (F '''F T F /8.(D0
and to the A+DL/(,70 model 2ithout a deterministic trend,
y
t
G H
7
I L
7
.
t
I Ky
tC(
I u
t
F t G (F '''F T ' /8.(*0
%or completeness the asymptotic results #or these models are summariNed in
The1
orems 8.9 and 8.D.
Theorem 8.9. $nder the assumptions /A(0 and /A*0, the 4L" estimators o#
H
7
F H
(
and K in /8.(D0, denoted by He
7T
, He
(T
, and K
e
T
,are all
p
T 1consistent,
and asymptotically normally distributed. 3n addition,
p
T /He
(T
C H
(
0 and
p
T
/K
e
T
C K0
PBQ
u
u
/( C K
e
T
0
8
P
T
u
(
(
(
are per#ectly collinear asymptotically and the covariance matri. o# /He
7T
, He
(T
,
K
e
T
0 is asymptotically singular 2ith ran? eEual to 8. %urthermore, the estimator
o# the long run parameter R, computed by He
(T
G/( C K
e
T
0, has the #ollo2ing
asymptotic distribution'
9
a
f
(8^
8
^
T
8
/
e
R
T
C R0 \
<
7F
u
/( C
K0
8
' /8.(A0
Theorem 8.D. $nder assumptions /A(0 1 /A*0, the 4L" estimators o# H
7
F L and
K in /8.(*0, denoted by He
7T
, L
e
T
, and K
e
T
are
p
T 1consistent, and have the
asymp1 totic /mi.ture0 normal distributions. 3n addition,
p
T /He
(T
C H
(
0 and
p
T /K
e
T
C K0
are per#ectly collinear asymptotically and so the covariance matri. o# /He
7T
,
L
e
T
, K
e
T
0 is asymptotically singular 2ith ran? eEual to 8. %urthermore, the
estimator o# the long run parameter S, given by S
e
T
G L
e
T
G/( C K
e
T
0F has the
mi.ture normal
distribution asymptotically, and
g
8
e
a
f
^
8
^
J
_
T
T /S
T
C S0 \
<
8 7
7F
/( C
3
?
K0
8
F /8.(-0
2here g
J
_
T
G T
C
J
T
H
T
J
T
'
=e#ore considering a more general speci6cation o# the A+DL model, 2e e.amine
the relation bet2een the standard errors o# the estimator o# the long1run para1
meter, S, obtained #rom our asymptotic results and the standard errors obtained
#rom the so called XdeltaY method /51method #or short0. %or ease o# e.position
2e consider the simple model /8.(*0, and 2ithout loss o# generality #ocus on the
case 2here .
t
is a scalar /i.e., ? G (0. %rom Theorem 8.D 2e have
g
8
e
( M
T
i
8
J
8
e
a
f
^
8
^
J
_
T
T /S
T
C S0 G
8
P
T
tG(
/.
t
C
.[0
8
/S
T
C S0 \
<
C(
P
T
7F
/( C
-
K0
8
F /8.(B0
2here g
J
_
T
G T
C
tG(
/.
t
C
.[0
and .[ G
T
tG(
.
t
. Hence a consistent
estimator o# the variance o#
e
S
T
is given by
^e
8
(
&
e
/
e
S
T
0 G
uT
' /8.()0
T
tG(
/.
t
C .[0
8
-
3n the case 2here .
t
is 3/70 2e have the same asymptotic result given by /8.(B0F that is,
since T
C(
.
7
H
T
.
T
G 4
p
/(0 and
p
T /
e
S
T
C S0 G 4
p
/(0, hence
/T
C(
.
7
8
p
( M
T
i
8
J
8
a
f
^
8
^
T
H
T
.
T
0 T /
e
S
T
C S0
G
tG(
/.
t
C
.[0
/
e
S
T
C S0 \
<
7F
/( C
K0
8
'
P)Q
7
^
e
T
C
^
e
t
C S
0
t
C S
0
._ 0
/
T
uT
8
P P
T
/
8
The computation o# the variance o#
e
S
T
by the 51method involves appro.imating
L
e
T
T
G g/j
e
T
0 G F
( C K
e
T
by a linear #unction o# j
e
T
G /L
e
T
F K
e
T
0
7
, and then appro.imating the variance o#
e
S
T
by the variance o# the resulting linear #unction. Denoting the estimator o# the
variance o#
e
S
T
by &
e
5
/
e
S
T
0, 2e have
&
e
5
/
e
S
T
0
G
k
l g /j
e
T
0
m
&
e
/j
e
T
0
k
l g /j
e
T
0
m
lj
e
T
M
( L
e
T
lj
e
T
i
8
(
9
(CK
e
T
G F
( C K
e
T
/( C K
e
T
0
8
8
/+
7
H
T
+
T
0
C(
A
D
-
F
L
e
T
*
/(CK
e
T
0
8
2here +
T
G /.
T
F y
T C(
0. A#ter some algebra &
e
5
/
e
S
T
0 can be e.pressed as
^e
8
h i
(
` P
/y
t (
C y[0
8
C
P
/y C y[0
/.
C .
[0
W `
(
W
&
e
5
/
e
S
T
0 G
uT
(F
e
S
T
C tC( t
F
/( C K
e
T
0
8
D
T
C
P
/y
tC(
C y[0/.
t
C .[0
P
/.
t
C
.[0
T
/8.870
2here the bar over the variable denotes the sample mean, and
D
T
G
M
T
J
/.
t
C
.[0
8
tG(
i M
T
J
/y
t
tG(
i
(
C
y[0
8
M
T
C
J
/y
tG(
tC(
C y[0
/.
t
i
8
C .[0 '
$sing /8.*0, recalling that R G 7 and de6ning y_
tC(
G y
tC(
C y[F ._
t
G .
t
C .[ and
`_
t
G `
t
C `[, 2e also have
y_
tC(
G S._
t
I `_
t
F /8.8(0
2here `_
t
#ollo2s a general linear stationary process. "ubstituting this result in
/8.870, 2e obtain
8
&
e
5
/ 0 G
uT
P
T
tG(
`_
8
I
/
8
T
T
tG(
._
8
C
8/
T
T
tG(
._
t
`_
t
' /8.880
/( C K
e
T
0
8
P
T
8
P
tG(
t
tG(
`_
t
0 C
/
P
T
tG(
._
t
`_
t
0
8
"ince `_
t
is 3/70 and ._
t
is 3/(0, using the results #amiliar in the literature /see,
#or e.ample, Phillips and Durlau# /()BA00, 2e have
T T T
T
C(
J
`_
8
G 4
p
/(0F T
C8
J
._
8
G 4
p
/(0F T
C(
J
._
t
`_
t
G 4
p
/(0'
t
tG (
t
tG( tG(
P(7Q
/( C K0
8
T
C8
P
T
tG(
u
Also #rom the result o# Theorem 8.D 2e ?no2 that T /
e
S
T
C S0 G 4
p
/(0.
Hence, ta?ing probability limits o# the right hand side o# /8.880 as T m (, 2e
have
^
8
(
&
e
5
/
T
0 G
u
I o
p
/(0'
tG(
/.
t
C .[0
8
There#ore, the standard error #or the estimator o# the long run parameter, S,
obtained using the 51method is asymptotically the same as that given by /8.()0,
2hich 2as derived assuming that .
t
is 3/(0. 4ne important advantage o# the
variance estimator obtained by the 51method over the asymptotic #ormula /8.()0
lies in the #act that it is asymptotically valid irrespective o# 2hether .
t
is 3/(0 or
3/70, 2hile the latter estimator is valid only i# .
t
is 3/(0.
The t2o variance estimators clearly dier in 6nite samples. <otice that /
P
T
._
t
`_
t
0
8
is asymptotically negligible compared to other terms in /8.880, but it may not be
negligible in 6nite samples, especially 2hen ._
t
and `_
t
are correlated. %or a
com1 parison o# the small sample properties o# the t2o variance estimators
see the Monte Carlo results reported in "ection *.
9. @eneral Autoregressive Distributed Lag Models 2ith
a
Deterministic Trend and 3/(0 +egressors
"o #ar 2e have derived the estimation and asymptotic results #or the simple
A+DL/(,70 model under the t2o strong assumptions /A(0 and /A90. These as1
sumptions, ho2ever, are too restrictive in the time series analysis, and so the
estimation procedures developed in "ection 8 are not e.pected to be robust to
the violation o# these assumptions, because the limiting distributions o# the 4L"
estimators 2ould then be inconsistent andnor depend on nuisance parameters.
;e 6rst rela. the assumption /A(0 and allo2 #or the possibility o# the error
process in /8.(0 to be serially correlated. To deal 2ith this serial correlation 2e
consider the A+DL/pF E0 model,
B
K/L0y
t
G H
7
I H
(
t I L
7
/L0.
t
I u
t
F /9.(0
2here K/L0 G ( C P
p
K L
>
, and L/L0 G
P
E
L L
>
, and assume
> G( > >G7 >
/A(0
7
The scalar disturbance, u
t
F in the A+DL/pF E0 model /9.(0 is iid/7F ^
8
0.
B
%or convenience 2e use the same notation u
t
#or the disturbance terms in /8.(0 and /9.(0. 3n
practice the order o# the lag polynomials operating on dierent elements o# .
t
could be dierent.
=ut this does not aect the asymptotic theory presented belo2.
P((Q
>G7
K
>
G
C C C
>
G
$sing the decomposition L/L0 G L/(0 I /( C L0L
/L0, 2here L/(0 G
P
E
L
>
F
L
/L0 G
P
EC(
L
L
>
and L
G C
P
E
L F /9.(0 can be re2ritten as
>G7 > > iG> I( i
EC(
K/L0y
t
G H
7
I H
(
t I L
7
.
t
I
J
L
7
5.
t
>
I u F /9.80
>
C t
>G7
2here 2e have used L G L/(0. "imilarly, applying the decomposition K/L0 G
K/(0 I /( C L0K
/L0 to /9.80, 2here K/(0 G ( C
P
p
K F K
/L0 G
P
pC(
K
L
>
and
iG( i
p
>G7 >
P
iG> I(
K
i
F 2e have
EC(
K/(0y
t
G H
7
I H
(
t I L
7
.
t
I
J
L
7
5.
t
>
C K
/L0 PK/L0Q
C(
L/L0
j
7
5.
t
I
K/(0
o
( /( L0K
/L0 PK/L0Q
C(
j
u
t
F
K/(0
/9.D0
H
7
C K
/(0R H
(
L
[
7
G
<o2 it is easily seen that
F R G F S G S/(0 G '
K/(0 K/(0
K/(0
(
and
/( C L0L
/L0 C /( C L0K
/L0
PK/L0Q
C
K/(0
L/L0
G S/L0 C SF
( C /( C L0K
/L0 PK/L0Q
C(
K/(0
( C #K/L0 C K/(0g PK/L0Q
C(
K/(0
G PK/L0Q
C(
F
2here S/L0 G L/L0GK/L0. $sing these results and the decomposition S/L0 G
S/(0 I /( C L0S
/L0, 2here S
/L0 G
P
(
S
L
>
and S
G C
P
(
S
i
in /9.D0 2e
obtain
> G7 > > iG>I(
(
y
t
G [
7
I Rt I S
7
.
t
I S
7
/L05. I
PK/L0Q
C
u
t
' /9.*0
Matching the regressors on the right1hand1side o# /9.80 2ith those in /9.*0 2e
6nally obtain
EC(
y
t
G [
7
I Rt I S
7
.
t
I
J
S
7
5.
t
C>
I `
7t
F /9.A0
> G7
P(8Q
>GE >
C
i>
S
T
uT
/P
8
@
T
(
2here `
7t
G
P
(
S
7
e
t >
I PK/L0Q
C(
u
t
. "imilarly,
EC(
J
y
tCi
G [
i
I Rt I S
7
.
t
I
2here [
i
G [
7
C iR, i G (F '''F pF
> G7
g
7
5.
tC>
I `
it
F i G (F '''F pF /9.-0
and
g
i>
G
f
CS i# i T >
^
F 7 >
> C(
i# i ` >
`
` E C(F i G (F '''F pF
/
P
(
S
7
e
t i >
I PK/L0Q
C(
u #or i ` E
0
`
it
G
>GECi >
C C
CS
7
P
iCEC( 7
tCi
C(
' /9.B0
>G7
e
tCEC>
I S /L0e
tCi
I PK/L0Q u
t
#or i T E
As in the previous section, 2e re2rite the A+DL/pF E0 model /9.80 in matri.
notations in the partitioned regression #orm,
y
T
G @
T
# I !
T
K I u
T
/9.)0
G H
7
d
T
I "
T
c I ;
T
L
I !
T
K I u
T
F
2here y
T
G /y
(
F '''F y
T
0
7
, y
TFCi
G /y
(Ci
F '''F y
T Ci
0
7
F #or i G (F '''F pF !
T
G /y
TFC(
F '''F y
TF
Cp
0F
5J
TFC>
G /5.
(C>
F '''F 5.
T C>
0 #or > G 7F '''F EC(F ;
T
G /5.
TF7
F 5.
TFC(
F '''F 5.
TFCEI(
0F
d
T
G /(F '''F (0
7
, t
T
G /(F '''F T 0
7
, J
T
G /.
(
F '''F .
T
0
7
, @
T
G /d
T
F t
T
F J
T
F ;
T
0 G
/d
T
F "
T
F ;
T
0, u
T
G /u
(
F '''F u
T
0
7
, # G /H
7
F c
7
F L
7
0
7
, c G /H
(
F L
7
0
7
, L
G /L
7
F '''F L
7
0
7
7 EC(
and K G /K
(
F '''F K
p
0
7
' <ote that the dimensions o# !
T
, @
T
, K and # are T O pF T O
/? I ?E I 80F p O ( and /? I ?E I 80 O (, respectively.
Theorem 9.(. $nder assumptions /A(0
7
and /A80 1 /A*0, the 4L" estimators o#
K and c G /H
(
F L
7
0
7
in the A+DL/pF E0 model /9.)0 are
p
T 1consistent and have
the #ollo2ing asymptotic distributions'
p
a
o j
T /K
e
T
C K0 \
<
7F ^
8
g
C(
F /9.(70
u :
2here g
:
is the pOp positive de6nite covariance matri. o# /`
(t
F `
8t
F '''F `
pt
0
7
de6ned
by /9.B0, and
p
a
o j
T /ec
T
C c0 \
<
7F ^
8
d
7
g
C(
d
p
WW
7
F /9.((0
u p :
2here W G /RF S
7
0
7
, d
p
is the p1dimensional unit vector, and ran?/WW
7
0 G (. The
4L" estimators o# H
7
and L
, denoted by He
7T
and L
e
F are also
p
T 1consistent, and
have the mi.ture normal distributions, asymptotically. The covariance matri. #or
all the short1run parameters, h G /#
7
F K0
7
, is asymptotically singular 2ith ran?
eEual to ?E I 8, and can be consistently estimated in the usual 2ay by
&
e
/h
e
T
0 G ^e
8 7
P
@
T
0
C(
F
2here P
@
T
G /@
T
F !
T
0F and ^e
uT
G
T
C
/y
T
C P
@
T
h
e
T
0
7
/y
T
C P
@
T
h
e
T
0.
P(9Q
2here K
e
T
/(0 G ( C
P
T
u
u
^
iG(
T
T
(
u
%rom Theorem 9.( 2e also 6nd that
p
T /He
(T
C H
(
0 and
p
T /L
e
T
C L0 are
asymp1 totically per#ectly collinear 2ith
p
T /K
e
T
C K0F that is,
T
n o p
/ec
T
C c0 I
WPK
e
/(0 C
K/(0Q
G o
p
/(0' /9.(80
p
iG(
K
e
i
T
. 3t is also straight#or2ard to sho2 that
/ec
T
C c0 I WPK
e
T
/(0 C K/(0Q
W
e
T
C W G
K
e
T
/(0
' /9.(90
$sing Theorem 9.(, and results /9.(80 and /9.(90, 2e have'
Theorem 9.8. $nder the assumptions /A(0
7
and /A80 1 /A*0, the 4L" estimators
o# the long1run parameters,
W
e
T
G /
e
R
TF
S
e
7
0
7
G
ec
T
GK
e
/(0 in /9.)0, converge to
their true values at #aster rates than the estimators o# the associated short1run
parameters, and #ollo2 the mi.ture normal distribution asymptotically. There#ore,
g
8
C(
e
a
f
^
8
^
"
_
T
D
"
T
/W
T
C W0 \
<
7F 3
?I(
PK/(0Q
8
F /9.(D0
2here g
"
_
T
and D
"
T
are as de6ned in Theorem
8.8.
Comparing Theorems 8.8 and 9.8, 2e 6nd that the presence o# the 3/70 stationary
regressors in /9.)0 /i.e., additional lagged changes in y
t
and the lagged changes
in .
t
2hich are introduced to deal 2ith the residual serial correlation problem0
does not aect the asymptotic properties o# the 4L" estimator o# the long run
coe5cients, R and S. There#ore, in#erences concerning the long1run parameters
can be based on the same standard tests as given by /8.(80 and /8.(90. 3n this
more general case, ho2ever, the e.pression #or the asymptotic variance o# W
e
T
is still given by /8.((0, but 2ith ^
8
G/( C K0
8
replaced by the more general
e.pression,
8
GPK/(0Q
8
.
;e no2 rela. assumption /A90 and allo2 #or the possibility o# endogenous
regressors, but con6ne our attention to the case 2here 5.
t
can be represented by
a 6nite order vector A+/s0 process,
)
2here P/L0 G 3
?
C
P
s
P/L05.
t
G M
t
F /9.(*0
P
i
, and P
i
, i G (F '''F s, are the ? O ? coe5cient matrices
such that the vector autoregressive process in 5.
t
is stable. Here M
t
are assumed
)
4ur analysis can also allo2 #or the inclusion o# lagged 5yZs and a dri#t term in /9.(*0 2ithout
aecting the results presented belo2. 4n this see =os2i>? /())*0 and Pesaran, "hin and "mith
/())A0.
P(DQ
t
^
>
V
to be serially uncorrelated, but possibly contemporaneously correlated 2ith u
t
F
namely, 2e assume that p
t
G /u
t
F M
7
0
7
#ollo2s the multivariate iid process
2ith mean Nero and the covariance matri.,
`
8
q
pp
G
u
q
uM
W
' /9.(A0
q
Mu
q
MM
;e 2ill, ho2ever, continue to assume that Cov/u
tC>
F M
tCi
0 G 7 #or i G >. <o1
tice that despite this assumption the model is still general enough to allo2
not only #or the contemporaneous but also #or cross1autocorrelations bet2een u
t
and
5.
t
. ;ith assumption /A90 rela.ed, the 4L" estimators in /9.(0 are no longer
consistent. To correct #or the endogeneity o# .
t
, 2e model the
contemporaneous
correlation bet2een u
t
and M
t
by the linear regression o# u
t
on M
t
u
t
G d
7
M
t
I V
t
F /9.(-0
2here using /9.(A0 2e have d G q
C(
q
7
, and M
t
is strictly e.ogenous 2ith respect
MM uM
to V
t
.
(7
"ubstituting /9.(*0 in /9.(-0 2e obtain'
u
t
G d
7
P/L05.
t
I V
t
F /9.(B0
2here 5.
tCi
Zs, i G 7F '''F sF are also strictly e.ogenous 2ith respect to V
t
. The
parametric correction #or the endogenous regressors is then eEuivalent to
e.tending the A+DL/pF E0 model /9.80 to the more general A+DL/pF m0 speci6
cation,
mC(
K/L0y
t
G H
7
I H
(
t I L
7
.
t
I
J
U
7
5.
t
C>
I V
t
F /9.()0
>G7
2here m G ma./EF s I (0, and U
i
G L
C P
7
d, i G 7F (F 8F '''F m C (, P
7
G 3
?
,
i i
L
i
G 7 #or i W E, and P
i
G 7 #or i W s.
;e no2 replace assumption /A90 by
/A90
7
The scalar disturbance V
t
in /9.()0 is iid/7F ^
8
0, and 5.
t
#ollo2s the general
stationary process given by /9.(*0. %urthermore, V
t
and M
t
are uncorrelated
such that .
t
and 5.
tC>
Zs > G 7F '''F m C (F are strictly e.ogenous 2ith
respect to V
t
in the A+DL/pF m0 model /9.()0.
There are t2o main dierences bet2een the A+DL models de6ned by /9.80 and
/9.()0. %irstly, the order o# lagged 5.
t
Zs in the t2o models can dier, and
secondly, the coe5cients on 5.
t
Zs and their lagged values have dierent
interpretations. Although this alters the dynamic structure o# the model, the basic
#rame2or? #or estimating the long1run parameters and carrying out statistical
in#erence on them is the same as be#ore.
(7
The relation /9.(-0 2ill be e.act 2hen the >oint distribution o# u
t
and M
t
is normal.
P(*Q
K
T
iG(
T
^
V
> >
(
f
V
C
Theorem 9.9. $nder the assumptions /A90
7
, /AD0 and /A*0, the 4L" estimators
p
o# the short1run parameters in /9.()0, H
7
, H
(
, L, K
(
F '''F K
p
, U
7
F '''F U
mC(
, are T 1
consistent, and asymptotically have the /mi.ture0 normal distributions. %urther1
i
more,
p
T /ec
T
C c0 is asymptotically per#ectly collinear 2ith
p
T h
e
/(0 C K/(0 ,
2here c G /H
(
F L
7
0
7
and K/(0 G ( C
P
p
K
i
, such that the covariance matri. #or
the estimators o# the short1run parameters is asymptotically singular 2ith ran?
eEual to ?m I 8. The asymptotic distribution o# the 4L" estimators o# the long1
run parameters,
there#ore,
W
e
T
G
/
TF
S
e
7
0
7
G
ec
T
GK
e
T
/(0 in /9.()0, are mi.ture normal and
g
8 C(
e a
8
^
"
_
T
D
"
T
/W
T
C W0 \
<
7F 3
?I(
PK/(0Q
8
F /9.870
2here ^
8
is the variance o# V
t
in /9.()0, and g
"
_
T
and D
"
T
are as de6ned in
Theorem 8.8.
There are no #undamental dierences bet2een the results o# Theorems 8.8,
9.8 and 9.9, as #ar as the estimators o# the log1run parameters are concerned. A
com1 parison o# /8.((0, /9.(D0 and /9.870 sho2s that the asymptotic distributions o#
the
estimators o# the long1run parameters, W
e
T
, under various assumptions
discussed
above dier only by a scalar coe5cient.
3n sum, in the conte.t o# the A+DL model in#erence on the long run para1
meters, R and S, is Euite simple and reEuires a priori ?no2ledge or estimation o#
the orders o# the e.tended A+DL/pF m0 model. Appropriate modi6cation o# the
orders o# the A+DL model is su5cient to simultaneously correct #or the resid1
ual serial correlation and the problem o# endogenous regressors. &ariances o# the
4L" estimators o# the long1run coe5cients can then be consistently estimated
using either /9.870, or by means o# the 51method applied directly to the long1
run estimators. Alternatively, one could compute the estimates o# the long1run
coe5cients and their associated standard errors using =e2leyZs /()-)0 regression
procedure. =e2leyZs method involves re2riting /9.()0 as
H
7
(
mC(
J
p (
(
J
V
t
K/L0y
t
G
K/(0
I Rt I S
7
.
t
I
K/(0
>G7
U
7
5.
tC>
C
K/(0
>G7
K
5y
tC>
I
K/(0
F /9.8(0
and then estimating it by the instrumental variable method using /(, t, .
t
, 5.
t
,
5.
tC(
F '''F 5.
tCmI(
, y
tC(
, y
tC8
F '''F y
tCp
0 as instruments. 3t is easy to sho2 that
the
3& estimators o# R and S obtained using /9.8(0 are numerically identical to the
4L" estimators o# R and S based on the A+DL model /9.()0, and that the standard
errors o# the 3& estimators #rom the =e2leyZs regression are numerically identical
to the standard errors o# the 4L" estimators o# R and S obtained using the 51
method. /"ee, #or e.ample, =ardsen /()B)0.0 The main attraction o# the =e2leyZs
P(AQ
regression procedure lies in its possible computational convenience as compared to
the direct 4L" estimation o# /9.()0 and computation o# the associated standard
errors by the 51method.
((
%inally, 2e note in passing that the results developed in this section also apply
to the case 2here the underlying regressors, .
t
, given by /9.(*0, are 3/70. /"ee
#ootnote - and the Monte Carlo simulation results in "ection *.0
D. A Comparison o# A+DL and Phillips1Hansen Procedures
Here 2e #ocus on the case 2here there e.ists a uniEue cointegrating relation be1
t2een 3/(0 variables, y
t
and .
t
, possibly 2ith a deterministic trend. The case
2here there are multiple cointegrating relations among 3/(0 variables presents
ad1 ditional di5culties and 2ill not be discussed in this paper. /"ee Pesaran and
"hin /())*0, and the re#erences cited therein0.
Consider the #ollo2ing cointegrating relation
y
t
G [ I Rt I S
7
.
t
I v
t
F /D.(0
5.
t
G e
t
' /D.80
Although the 4L" estimator o# S is sho2n to be T 1consistent, /see "toc? /()B-00,
it has also been #ound that the 6nite sample behavior o# the 4L" estimator is
generally very poor /see, #or e.ample, =aner>ee et. al. /()BA00. specially, in the
presence o# non1Nero correlation bet2een v
t
and e
t
, 4L" estimators o# S in /D.(0
are o#ten heavily biased in 6nite samples, and in#erences based on them are invalid
because o# the dependence o# the limiting distribution o# the 4L" estimators on
nuisance parameters. %or details see Phillips and Loretan /())(0.
=roadly spea?ing, there are t2o basic approaches to cointegration analysis' ,o1
hansenZs /())(0 ma.imum li?elihood approach, and Phillips1HansenZs /())7, PH0
#ully modi6ed 4L" procedure.
(8
The A+DL approach to cointegration analysis
advanced in this paper is directly comparable to the PH procedure, and 2e shall,
there#ore concentrate on this method. PH assume that v
t
and e
t
in /D.(0 and /D.80
#ollo2 the general correlated linear stationary processes'
(9
v
t
G A
(
/L0u
t
F e
t
G A
8
/L0M
t
F /D.90
((
%or a computer implementation o# the A+DL approach using the 51method see
Pesaran and Pesaran /())-0.
(8
There are also other related procedures such as the original t2o1step method o# ngle and
@ranger /()B-0, the leads and lags estimation procedure suggested by "ai??onnen /())(0 and
"toc? and ;atson /())90, and the canonical method by Par? /())80.
(9
%or more details see Phillips and "olo /())80.
P(-Q
t
iG(
t
MM
t
(*
MM
2here p
t
G /u
t
F M
7
0
7
are serially uncorrelated random variables 2ith Nero means
and a constant variance matri. given by /9.(A0. Assuming A
(
/L0 and A
8
/L0 are
invertible, /D.(0 can be appro.imated as an A+DL speci6cation by truncating
the order o# the in6nite order lag polynomials PA
(
/L0Q
C(
and PA
8
/L0Q
C(
such that
K/L0 U PA
(
/L0Q
C(
and P/L0 U PA
8
/L0Q
C(
, 2here the orders o# the lag polyno1
mials K/L0 and P/L0 are denoted by p and s, respectively. Then 2e obtain the
appro.imate 6nite1dimensional A+DL/pF m0 speci6cation,
K/L0y
t
G #K/(0[ I RK
7
/(0g I RK/(0t I K/L0S
7
.
t
I q
uM
q
C(
P/L05.
t
I V F
/D.D0
MM t
2here K
7
/(0 G C
P
p
iK
i
, m G ma./pF s I (0, and by construction .
t
/and 5.
t
Zs0
are uncorrelated 2ith V
t
.
(D
<otice that /D.D0 is o# the same #orm as /9.()0, 2ith
the #ollo2ing relations among their parameters' H
7
G K/(0[ I RK
7
/(0, H
(
G RK/(0,
L G K/(0S, U
7
/L0 G K
/L0S
7
I q
uM
q
C(
P/L0, 2here K
c
uT
/P
T
T
T
e
T
@
T
K
(8
2here g
((
is the /(,(0 element o# g
C(
. The above result can be re2ritten sepa1
c c
rately #or He
7T
F ec
T
and L
e
as
p
C 5
p
p
e
V
T /He
7T
C
H
7
0 I
p
[
(
F [
8
F '''F [
p
T K
T
C
K
p
G d
cuF(
I o
p
/(0F /A.(D0
V
T /ec
T
C c0 I
Wd
7
T
p
K
e
C K G o
p
/(0F /A.(*0
p
T
p
e
V
p
p
e
V
T
C
L
I /g
(
F g
8
F '''F
g
p
0
T K
T
C
K
G g
C(
E
;u
I o
p
/(0F /A.(A0
;
2here d
p
is a p O ( vector o# unity and d
cuF(
is the 6rst element o# g
C(
E
cu
. $sing
/9.(70 in /A.(*0 2e obtain /9.((0. 3t is also clear #rom above results that the
4L" estimators o# H
7
and L
/standardiNed by
p
T 0 have the /mi.ture0
normal
distributions asymptotically.
%inally, using /9.(70, /9.((0, and /A.(901/A.(A0, it is easily seen that a consis1
tent estimator o# the variance o# h
e
T
is given by &
e
/h
e
T
0 G ^e
8
7
P
@
T
0
C(
2ith
the ran? o# &
e
/h
e
T
0 being eEual to ?E I 8.
Proo# o# Theorem 9.8.
Partition d
T
G /a
T
F s
7
F 2
7
0
7
con#ormably to @
T
G /d
T
F "
T
F ;
T
0F then s
T
is
given by
T
s
T
G
p
T
/ec
T
C c0 I Wd
7
p
p
K
e
C
V
' /A.(-0
T
p
T
T
$sing /A.(70 and /A.((0, /s
7
F 2
7
0
7
can be e.pressed as
T T
`
s
T
W `
"
7
G
7
W
(
`
T
W
/A.(B0
T
H
T
"
T
"
T
H
T
;
T
C
"
7
H
T
u
T
T
H
T
"
T
;
7
H
T
;
T
;
7
H
T
u
T
`
"
7 7
W
C(
` W
p V
T
H
T
"
T
"
T
H
T
;
T
"
7
H
T
:
T
K
e
K ' C
;
7 7 7 T
C
Let
T
H
T
"
T
;
T
H
T
;
T
;
T
H
T
:
T
E
"_
T
u
T
G D
"
T
"
T
H
T
u
T
F g
"_
T
G D
"
T
"
T
H
T
"
T
D
"
T
F
7 7
9
(
2here D
"
T
G Diag/T
C
8
F T
C
3
?
0. Then, it is also easily seen that as T m (,
M
+
(
(
i
E
"
_
T uT
0 E
"
_
u
G
7
/r C
8
0d=
u
/r0
+
(
=
_
7
F /A.()0
7
e
/r0d=
u
/r0
M
(
+
(
(
i
g
"
_T 0 g
"
_
G
+
( ( 7
7
/r C
8
0=
_
e
/r0dr
+
(
F /A.870
7
/r C
8
0=
_
e
/r0dr
7
=
_
7
/r0=
_
e
/r0dr
PA.DQ
D
"
7 C(
" "
_
"
t
C
t
C
t
C
(
(
T
2here =
_
e
/r0 G =
e
/r0 C
+
=
e
/r0dr is a ?1dimensional demeaned =ro2nian motion
7
on P7F (Q. "ince =
_
e
/r0 is also distributed independently o# =
u
/r0, 2e obtain as
in
/A.D0,
a
8
E
"
_
u
\ M<
C
7F ^
u
g
"
_
5
' /A.8(0
Multiplying /A.(B0 by the diagonal matri., Diag/D
C(
F T
(
0, using /A.()01/A.8(0
and noting that
"
T
8
T
" H
T
;
T
G 4
p
/(0F T ;
7
H
T
;
T
G 4
p
/(0F
T T
(
D
"T
"
7
H
T
:
T
G 4
p
/(0F T
C
8
;
7
H
T
:
T
G 4
p
/(0F
2e obtain
T
D
C( C(
a
T
p
8 C(
V
and there#ore,
"
T
s
T
0 g
_
E
"
_
u
\ M< 7F ^
u
g
_
F
g
8 C(
a
C
8
5
"
_
T
D
"
T
s
T
\ <
%inally, by /9.(90 and /A.(*0 2e have
7F ^
u
3
?I(
s
T
' /A.880
W
e
T
C W G
K
e
T
/(0
' /A.890
(
Multiplying /A.890 by g
8
"
T
D
C(
, using /A.880 and noting that
K
e
T
p
/(0 m K/(0F 2e
obtain /9.(D0.
Proo# o# Theorem 9.9 can be established in a similar manner and is omitted to
save space.
Proo# o# Theorem D.(.
Consider the dynamic A+DL/pF m0 model /9.()0 /or /D.D00, and its static coun1
terpart /D.(0. Applying the decomposition K/L0 G K/(0 I /( C L0K
/L0 to
/9.()0 2e have
H
7
U
7
/L0 V
t
K
/L0
y
t
G
K/(0
I Rt I S
7
.
t
I
5. I
K/(0 K/(0
5y
t
' /A.8D0
K/(0
"ubstituting #or 5y
t
G R I S
7
5.
t
I 5v
t
#rom /D.(0 in /A.8D0, 2e have
U
7
/L0 V
t
K
/L0
y
t
G [ I Rt I S
7
.
t
I
5. I
K/(0 K/(0
/S
7
5.
t
I 5v
t
0 ' /A.8*0
K/(0
$sing /A.8*0, v
t
in /D.(0 can be e.pressed as
U
7
/L0 C K
/L0S
7
V
t
K
/L0
v
t
G 5. I
K/(0 K/(0
5v
t
' /A.8A0
K/(0
PA.*Q
t
0 G
8
^
8
Vv
^
7
t
t
C
t
^
t
ee
^
v
V
De6ning ?
t
G /V F v
t
F 5.
7
0
7
G /V F v
t
F e
7
0
7
, and j/L
h
(
F
CK
/L0/(CL0
F
U
7
/L0CK
/L0S
7
i
,
t t t K/(0 K/(0 K/(0
then the spectral density o# v
t
G j/L0?
t
is given by
8U#
vv
/m0 G j/e
i2
0& ar/?
t
0j
7
/e
Ci2
0F
2here
V
^
Vv
7
9
& ar/?
t
0 G
D
^
7 8
q
ve
*
'
7 q
ve
q
ee
Hence, the spectral density o# v
t
at Nero #reEuency is given by
^
8 7
8U#
vv
/70 G
V
I PU /(0 C K
/(0S
7
Q q
ee
PU/(0 C K
/(0SQ
PK/(0Q
8
' /A.8-0
The Phillips1Hansen semi1parametric correction is eEuivalent to removing the
sec1 ond part o# /A.8-0, by subtracting the terms involving 5.
t
#rom v
t
. $sing
/A.8A0 2e have the #ollo2ing e.pression #or the modi6ed disturbance term,
v
I
, in the
Phillips1HansenZs procedure'
v
I
U
7
/L0 C K
/L0S
7
V
t
K
/L0
I I
t
G v
t
C 5. G
K/(0 K/(0
5v
t
G j
K/(0
/L0?
t
F
2here ?
I
G /V F v
t
0
7
F and j
I
/L0 G
h
(
F
CK /L0/(CL0
i
' There#ore, the spectral
t t
K/(0 K/(0
density o# v
I
at Nero #reEuency is given by
8
7
V
8U#
v
I
v
I /70 G j
I
/70& ar/?
I
0j
I
/70
G
PK/(0Q
8
'
$sing /D.-0 2e also have
#
v
I
v
I /70 G =#
\\
/70=
7
F
2here = G P(F C
ve
C(
Q. =y de6nition
\
G 8U#
\\
/70, and
8
8U#
v
I
v
I /70 G =
\
=
7
G m
vv
C
ve
C(
ev
G '
ee
PK/(0Q
8
8
8
Hence, by /D.B0 m
v5e
G ^
V
G PK/(0Q .
PA.AQ
+e#erences
P(Q =aner>ee, A., ,. Dolado, D. Hendry and @. "mith /()BA0, X.ploring Eui1
librium +elationships in conomics through "tatistical Models' "ome Monte
Carlo vidence,Y 4.#ord =ulletin o# conomics and "tatistics, DB' 8*918--.
P8Q =ardsen, @. /()B)0, XThe stimation o# Long1+un Coe5cients #rom rror
Correction Models,Y 4.#ord =ulletin o# conomics and "tatistics, *(' 9D*1
9*7.
P9Q =e2ley, +. /()-)0, XThe Direct stimation o# the Euilibrium +esponse in a
Linear Dynamic Model,Y conomics Letters, 9' 9*-19A(.
PDQ =os2i>?, H.P. /())*0, X5cient 3n#erence on Cointegration Parameters in
"tructural rror Correction Models,Y ,ournal o# conometrics, A)' (991(*B.
P*Q Cavanaugh, C.L., @. lliott and ,.H. "toc? /())*0, X3n#erence in Models 2ith
<early 3ntegrated +egressors,Y conometric Theory, ((' ((9(1((D-.
PAQ ngle, +.%. and C.;.,. @ranger /()B-0, XCointegration and rror Correction
+epresentation' stimation and Testing,Y conometrica, **' 8*(18-A.
P-Q Hendry, D., A. Pagan and ,. "argan /()BD0, XDynamic "peci6cationsuY Chap1
ter (B in Handboo? o# conometrics, &ol 33 /ed., c. @riliches and M.
3ntrili1 gator0, <orth Holland
PBQ Hsiao, C. /())*0, XCointegration and Dynamic "imultaneous Euations
Model,Y unpublished manuscript, $niversity o# "outhern Cali#ornia.
P)Q 3nder, =. /())90, Xstimating Long +un +elationships in conomics,Y ,our1
nal o# conometrics, *-' *91AB.
P(7Q ,ohansen, ". /())(0, Xstimation and Hypothesis Testing o# Cointegrating
&ectors in @aussian &ector Autoregressive Models,Y conometrica, *)' (**(1
B7.
P((Q Ltt?epohl H. /())(0, 3ntroduction to Multiple Time "eries Analysis, <e2
!or?, <.!. "pringer and &erlag.
P(8Q Par?, ,.!. /())80, XCanonical Cointegrating +egressions,Y conometrica, A7'
(()1(D9.
P(9Q Pesaran, M.H. /())-0, XThe +ole o# conomic Theory in Modelling the Long1
+un,Y The conomic ,ournal, (7-' (-B1()(.
P+.(Q
P(DQ Pesaran, M.H. and =. Pesaran /())-0, Micro6t D.7' 3nteractive conometric
Analysis, 4.#ord $niversity Press /#orthcoming0.
P(*Q Pesaran, M.H. and !. "hin /())*0, XLong1+un "tructural Modelling,Y un1
published manuscript, $niversity o# Cambridge.
P(AQ Pesaran, M.H., !. "hin and +.,. "mith /())A0, XTesting #or the .istence o# a
Long1+un +elationship,Y DA ;or?ing Papers Amalgamated "eries, <o.
)A88, $niversity o# Cambridge.
P(-Q Phillips, P.C.=. /())(0, X4ptimal 3n#erence in Cointegrated "ystems,Y cono1
metrica, *)' 8B9197A.
P(BQ Phillips, P.C.=. and ".<. Durlau# /()BA0, XMultiple Time "eries +egression
2ith 3ntegrated Processes,Y +evie2 o# conomic "tudies, *9' D-91D)A.
P()Q Phillips, P.C.=. and =. Hansen /())70, X"tatistical 3n#erence in 3nstrumental
&ariables +egression 2ith 3/(0 Processes,Y +evie2 o# conomic "tudies, *-'
))1(8*.
P87Q Phillips, P.C.=. and M. Loretan /())(0, Xstimating Long +un conomic
Euilibria,Y +evie2 o# conomic "tudies, *B' D7-1D9A.
P8(Q Phillips, P.C.=. and &. "olo /())80, XAsymptotic #or Linear Processes,Y An1
nals o# "tatistics ' )-(1(77(.
P88Q "ai??onnen, P /())(0, XAsymptotically 5cient stimation o# Cointegration
+egressions,Y conometric Theory, -' (18(.
P89Q "toc?, ,.H. /()B-0, XAsymptotic Properties o# Least "Euares stimates o#
Cointegrating &ectors,Y conometrica, **' (79*1(7*A.
P8DQ "toc?, ,.H. and M.;. ;atson /())90, XA "imple stimator o# Cointegrating
&ectors in Higher 4rder 3ntegrated "ystems,Y conometrica, A(' -B91B87.
P8*Q ;ic?ens, M.+. and T.". =reusch /()BB0, XDynamic "peci6cation, the Long
+un stimation o# the Trans#ormed +egression models,Y The conomic
,our1 nal, )B' (B)187*.
P+.8Q