Model Specification between Parametric and Nonparametric Cointegration
37 Pages Posted: 6 Sep 2012
Date Written: September 3, 2012
Abstract
This paper considers a general model specification between a parametric co-integrating model and a nonparametric co-integrating model in a multivariate regression model, which involves a univariate integrated time series regressor and a vector of stationary time series regressors. A new and simple test is proposed and the resulting asymptotic theory is established. The test statistic is constructed based on a natural distance function between a nonparametric estimate and a smoothed parametric counterpart. The asymptotic distribution of the test statistic under the parametric specification is proportional to that of a local-time random variable with a known distribution. In addition, the finite sample performance of the proposed test is evaluated through using both simulated and real data examples.
Keywords: Cointegration, nonparametric kernel estimation, nonstationary time series, parametric model specification
JEL Classification: C12, C14, C22
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