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Discussion Paper

Cointegrating Rank Selection in Models with Time-Varying Variance

Reduced rank regression (RRR) models with time varying heterogeneity are considered. Standard information criteria for selecting cointegrating rank are shown to be weakly consistent in semiparametric RRR models in which the errors have general nonparametric short memory components and shifting volatility provided the penalty coefficient Cn → infinity and Cn/n → 0 as n → ∞. The AIC criterion is inconsistent and its limit distribution is given.