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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 233:
Maximum likelihood estimation of the multivariate fractional cointegrating model

Johan Lyhagen ()

Abstract: Departures from an economic equilibrium should be mean reverting. The deviations are often assumed to be integrated of order zero but this is too restrictive. It is sufficient that the shocks are integrated of an order less than one, i.e. they may be fractionally integrated. A fractionally cointegrated system is developed. Further, estimation and testing are discussed, analytically and by Monte Carlo simulations. The Monte Carlo simulations shows that it is much more severe to ignore fractional cointegration than incorporating it when it is not present.

Keywords: Fractional integration; Granger representation theorem; Likelihood ratio test; Monte Carlo.; (follow links to similar papers)

JEL-Codes: C12; C13; C32; (follow links to similar papers)

22 pages, April 22, 1998

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