Unit Roots, Cointegration, and Pretesting in Var Models
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The views expressed here are the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
The views expressed here are the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
ISBN: 978-1-78190-752-8
Publication date: 13 December 2013
Abstract
This article investigates the robustness of impulse response estimators to near unit roots and near cointegration in vector autoregressive (VAR) models. We compare estimators based on VAR specifications determined by pretests for unit roots and cointegration as well as unrestricted VAR specifications in levels. Our main finding is that the impulse response estimators obtained from the levels specification tend to be most robust when the magnitude of the roots is not known. The pretest specification works well only when the restrictions imposed by the model are satisfied. Its performance deteriorates even for small deviations from the exact unit root for one or more model variables. We illustrate the practical relevance of our results through simulation examples and an empirical application.
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Acknowledgements
Acknowledgment
We would like to thank the participants at the 12th Annual Advances in Econometrics Conference for useful feedback. We are particularly indebted to Lutz Kilian for numerous detailed comments and insightful suggestions that substantially improved the presentation of the article.
Citation
Gospodinov, N., María Herrera, A. and Pesavento, E. (2013), "Unit Roots, Cointegration, and Pretesting in Var Models The views expressed here are the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
Publisher
:Emerald Group Publishing Limited
Copyright © 2013 Emerald Group Publishing Limited