Cointegrated Dynamics for a Generalized Long Memory Process: Application to Interest Rates

Manabu Asai; Shelton Peiris; Michael McAleer; David E. Allen

doi:10.1515/jtse-2018-0024

Cointegrated Dynamics for a Generalized Long Memory Process: Application to Interest Rates

Manabu Asai^*
, Shelton Peiris
, Michael McAleer
, David E. Allen

^*Corresponding author for this work

Econometrics

Soka University
The University of Sydney
Edith Cowan University
Asia University Taiwan

Research output: Contribution to journal › Article › Academic › peer-review

2 Citations (Scopus)

Abstract

Recent developments in econometric methods enable estimation and testing of general long memory processes, which include the general Gegenbauer process. This paper considers the error correction model for a vector general long memory process, which encompasses the vector autoregressive fractionally integrated moving average and general Gegenbauer processes. We modify the tests for unit roots and cointegration, based on the concept of heterogeneous autoregression. The Monte Carlo simulations show that the finite sample properties of the modified tests for unit roots are satisfactory, while the conventional tests suffer from size distortion. The experiments also indicate that the modified tests for cointegration improve the problem of finding too many cointegration relationships which arises for fractionally integrated series. Empirical results for interest rates series for the USA and Australia indicate that: (1) the modified unit root test detected unit roots for all series; (2) after differencing, all series favour the general Gegenbauer (GG) process; (3) the modified test for cointegration found only two cointegrating vectors; and (4) the zero interest rate policy in the USA had no effect on the cointegrating vectors for the two countries.

Original language	English
Article number	20180024
Journal	Journal of Time Series Econometrics
Volume	12
Issue number	1
DOIs	https://doi.org/10.1515/jtse-2018-0024
Publication status	Published - 7 Mar 2020

Bibliographical note

Funding Information:
Initial draft of this article was written while the first author was a Visiting Scholar at the University of Sydney. The authors are most grateful to Yoshi Baba, Karen Lewis, the Editor and two anonymous reviewers for very helpful comments and suggestions. The first author acknowledges the financial support of the Japan Ministry of Education, Culture, Sports, Science and Technology, the Japan Society for the Promotion of Science (Grant Number: JSPS KAKENHI JP16K03603), the School of Mathematics and Statistics at The University of Sydney, the Zengin Foundation for Studies on Economics and Finance, and the Australian Academy of Science. The second author acknowledges the support from the Faculty of Economics at Soka University. The third author is most grateful for the financial support of the Australian Research Council, Ministry of Science and Technology (MOST), Taiwan, and the Japan Society for the Promotion of Science. The fourth author acknowledges the Australian Research Council.

Publisher Copyright:
© 2020 Walter de Gruyter GmbH, Berlin/Boston 2020.

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Cite this

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title = "Cointegrated Dynamics for a Generalized Long Memory Process: Application to Interest Rates",

abstract = "Recent developments in econometric methods enable estimation and testing of general long memory processes, which include the general Gegenbauer process. This paper considers the error correction model for a vector general long memory process, which encompasses the vector autoregressive fractionally integrated moving average and general Gegenbauer processes. We modify the tests for unit roots and cointegration, based on the concept of heterogeneous autoregression. The Monte Carlo simulations show that the finite sample properties of the modified tests for unit roots are satisfactory, while the conventional tests suffer from size distortion. The experiments also indicate that the modified tests for cointegration improve the problem of finding too many cointegration relationships which arises for fractionally integrated series. Empirical results for interest rates series for the USA and Australia indicate that: (1) the modified unit root test detected unit roots for all series; (2) after differencing, all series favour the general Gegenbauer (GG) process; (3) the modified test for cointegration found only two cointegrating vectors; and (4) the zero interest rate policy in the USA had no effect on the cointegrating vectors for the two countries.",

author = "Manabu Asai and Shelton Peiris and Michael McAleer and Allen, \{David E.\}",

note = "Funding Information: Initial draft of this article was written while the first author was a Visiting Scholar at the University of Sydney. The authors are most grateful to Yoshi Baba, Karen Lewis, the Editor and two anonymous reviewers for very helpful comments and suggestions. The first author acknowledges the financial support of the Japan Ministry of Education, Culture, Sports, Science and Technology, the Japan Society for the Promotion of Science (Grant Number: JSPS KAKENHI JP16K03603), the School of Mathematics and Statistics at The University of Sydney, the Zengin Foundation for Studies on Economics and Finance, and the Australian Academy of Science. The second author acknowledges the support from the Faculty of Economics at Soka University. The third author is most grateful for the financial support of the Australian Research Council, Ministry of Science and Technology (MOST), Taiwan, and the Japan Society for the Promotion of Science. The fourth author acknowledges the Australian Research Council. Publisher Copyright: {\textcopyright} 2020 Walter de Gruyter GmbH, Berlin/Boston 2020.",

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N1 - Funding Information: Initial draft of this article was written while the first author was a Visiting Scholar at the University of Sydney. The authors are most grateful to Yoshi Baba, Karen Lewis, the Editor and two anonymous reviewers for very helpful comments and suggestions. The first author acknowledges the financial support of the Japan Ministry of Education, Culture, Sports, Science and Technology, the Japan Society for the Promotion of Science (Grant Number: JSPS KAKENHI JP16K03603), the School of Mathematics and Statistics at The University of Sydney, the Zengin Foundation for Studies on Economics and Finance, and the Australian Academy of Science. The second author acknowledges the support from the Faculty of Economics at Soka University. The third author is most grateful for the financial support of the Australian Research Council, Ministry of Science and Technology (MOST), Taiwan, and the Japan Society for the Promotion of Science. The fourth author acknowledges the Australian Research Council. Publisher Copyright: © 2020 Walter de Gruyter GmbH, Berlin/Boston 2020.

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N2 - Recent developments in econometric methods enable estimation and testing of general long memory processes, which include the general Gegenbauer process. This paper considers the error correction model for a vector general long memory process, which encompasses the vector autoregressive fractionally integrated moving average and general Gegenbauer processes. We modify the tests for unit roots and cointegration, based on the concept of heterogeneous autoregression. The Monte Carlo simulations show that the finite sample properties of the modified tests for unit roots are satisfactory, while the conventional tests suffer from size distortion. The experiments also indicate that the modified tests for cointegration improve the problem of finding too many cointegration relationships which arises for fractionally integrated series. Empirical results for interest rates series for the USA and Australia indicate that: (1) the modified unit root test detected unit roots for all series; (2) after differencing, all series favour the general Gegenbauer (GG) process; (3) the modified test for cointegration found only two cointegrating vectors; and (4) the zero interest rate policy in the USA had no effect on the cointegrating vectors for the two countries.

AB - Recent developments in econometric methods enable estimation and testing of general long memory processes, which include the general Gegenbauer process. This paper considers the error correction model for a vector general long memory process, which encompasses the vector autoregressive fractionally integrated moving average and general Gegenbauer processes. We modify the tests for unit roots and cointegration, based on the concept of heterogeneous autoregression. The Monte Carlo simulations show that the finite sample properties of the modified tests for unit roots are satisfactory, while the conventional tests suffer from size distortion. The experiments also indicate that the modified tests for cointegration improve the problem of finding too many cointegration relationships which arises for fractionally integrated series. Empirical results for interest rates series for the USA and Australia indicate that: (1) the modified unit root test detected unit roots for all series; (2) after differencing, all series favour the general Gegenbauer (GG) process; (3) the modified test for cointegration found only two cointegrating vectors; and (4) the zero interest rate policy in the USA had no effect on the cointegrating vectors for the two countries.

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Cointegrated Dynamics for a Generalized Long Memory Process: Application to Interest Rates

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