CFDP 866R

Optimal Inference in Cointegrated Systems

Author(s): 

Publication Date: February 1988

Revision Date: August 1989

Pages: 30

Abstract: 

This paper studies the properties of maximum likelihood estimates of co-integrated systems. Alternative formulations of such models are considered including a new triangular system error correction mechanism. It is shown that full system maximum likelihood brings the problem of inference within the family that is covered by the locally asymptotically mixed normal asymptotic theory provided that all unit roots in the system have been eliminated by specification and data transformation. This result has far reaching consequences. It means that cointegrating coefficient estimates are symmetrically distributed and median unbiased asymptotically, that an optimal asymptotic theory of inference applies and that hypothesis tests may be conducted using standard asymptotic chi-squared sets.

Keywords: 

Co-integration, Error correction model, Maximum likelihood, Unit roots, Asymptotic theory

JEL Classification Codes: 211

See CFP: 777