Publication: Cointegrated Dynamics for A Generalized Long Memory Process: An Application to Interest Rates
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2018-09
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Abstract
Recent developments in econometric methods enable estimation and testing of general long memory process, which include the general Gegenbauer process. This paper considers the error correction model for a vector general long memory process, which encompasses the vector autoregressive fractionally-integrated moving average and general Gegenbauer process. We modify the tests for unit roots and cointegration, based on the concept of heterogeneous autoregression. The Monte Carlo simulations show that the finite sample properties of the modified tests are satisfactory, while the conventional tests suffer from size distortion. Empirical results for interest rates series for the U.S.A. and Australia indicate that: (1) the modified unit root test detected unit roots for all series, (2) after differencing, all series favour the general Gegenbauer process, (3) the modified test for cointegration found only two cointegrating vectors, and (4) the zero interest rate policy in the U.S.A. has no effect on the cointegrating vector for the two countries.
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Initial draft of this article was written while the first author was a Visiting Scholar at the University of Sydney. The authors are most grateful to Yoshi Baba for very helpful comments and suggestions. The first author acknowledges the financial support of the Japan Ministry of Education, Culture, Sports, Science and Technology, Japan Society for the Promotion of Science, School of Mathematics and Statistics at The University of Sydney, and the Australian Academy of Science. The second author acknowledges the support from the Faculty of Economics
at Soka University. The third author is most grateful for the financial support of the Australian Research Council, Ministry of Science and Technology (MOST), Taiwan, and the Japan Society for the Promotion of Science. The fourth author acknowledges the Australian Research Council.
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