This paper proposes a likelihood ratio test for rank deficiency of a submatrix of the cointegrating matrix. Special cases of the test include the one of invalid normalization in systems of cointegrating equations, the feasibility of permanent–transitory decompositions and of subhypotheses related to neutrality and long-run Granger noncausality. The proposed test has a chi-squared limit distribution and indicates the validity of the normalization with probability one in the limit, for valid normalizations. The asymptotic properties of several derived estimators of the rank are also discussed. It is found that a testing procedure that starts from the hypothesis of minimal rank is preferable.

A likelihood ratio test for the rank of a cointegration submatrix

PARUOLO, PAOLO
2006-01-01

Abstract

This paper proposes a likelihood ratio test for rank deficiency of a submatrix of the cointegrating matrix. Special cases of the test include the one of invalid normalization in systems of cointegrating equations, the feasibility of permanent–transitory decompositions and of subhypotheses related to neutrality and long-run Granger noncausality. The proposed test has a chi-squared limit distribution and indicates the validity of the normalization with probability one in the limit, for valid normalizations. The asymptotic properties of several derived estimators of the rank are also discussed. It is found that a testing procedure that starts from the hypothesis of minimal rank is preferable.
2006
Cointegration; I(1); simultaneous system of equations; likelihood ratio test
Paruolo, Paolo
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11383/1503635
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