Bayesian approaches to cointegration

Gary Koop, Rodney Strachan, Herman Van Dijk, Mattias Villani

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Abstract

The degree of empirical support of a priori plausible structures on the cointegration vectors has a central role in the analysis of cointegration. Villani (2000) and Strachan and van Dijk (2003) have recently proposed finite sample Bayesian procedures to calculate the posterior probability of restrictions on the cointegration space, using the existence of a uniform prior distribution on the cointegration space as the key ingredient. The current paper extends this approach to the empirically important case with different restrictions on the individual cointegration vectors. Prior distributions are proposed and posterior simulation algorithms are developed. Consumers' expenditure data for the US is used to illustrate the robustness of the results to variations in the prior. A simulation study shows that the Bayesian approach performs remarkably well in comparison to other more established methods for testing restrictions on the cointegration vectors.
Original languageEnglish
Title of host publicationThe Palgrave Handbook of Theoretical Econometrics
Pages871-898
Number of pages27
Publication statusPublished - 2006

Keywords

  • time-series analysis
  • cross-sectional analysis
  • panel data analysis
  • exchange rates

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