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Abstract
It is well known that if X_{t} is a nonstationary process and Y_{t} is a linear function of X_{t}, then cointegration of Y_{t} implies cointegration of X_{t}. We want to find an analogous result for common trends if X_{t} is generated by a finite order VAR with i.i.d. (0,Ω_{x}) errors ε_{xt}. We first show that Y_{t} has an infinite order VAR representation in terms of its white noise prediction errors, ε_{yt}, which are a linear process in ε_{xt}, the prediction error for X_{t}. We then apply this result to show that the limit of the common trends for Y_{t} generated by ε_{yt}, are linear functions of the common trends for X_{t}, generated by ε_{xt}.
We illustrate the findings with a small analysis of the term structure of interest rates.
We illustrate the findings with a small analysis of the term structure of interest rates.
Original language | English |
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Journal | Journal of Econometrics |
Volume | 178 |
Issue number | Part 2 |
Pages (from-to) | 310-315 |
Number of pages | 6 |
ISSN | 0304-4076 |
DOIs | |
Publication status | Published - 2014 |
Bibliographical note
JEL classification: C32Activities
- 1 Lecture and oral contribution
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An asymptotic invariance property of the common trends under linear transformations of the data
Søren Johansen (Lecturer)
22 Oct 2013Activity: Talk or presentation types › Lecture and oral contribution