The Tail Behavior of Maximum Likelihood Estimates of Cointegrating Coefficients in Error Correction Models

This paper derives exact finite sample distributions of maximum likelihood estimators of the cointegrating coefficients in error correction models. The distributions are derived for the leading case where the variables in the system are independent random walks. But important aspects of the theory, in particular the tail behavior of the distributions, continue to apply when the system is cointegrated. The reduced rank regression estimator is shown to have a distribution with Cauchy-like tails and no finite moments of integer order. The maximum likelihood estimator of the coefficients in the triangular system representation has matrix t-distribution tails with finite integer moments in order T - n + r where T is the sample size, n is the total number of variables in the system and r is the dimension of the cointegration space. These results help to explain simulation studies where extreme outliers are found to occur more frequently for the reduced rank regression estimator than for alternative asymptotically efficient procedures that are based on the triangular representation.