Cointegrating Rank Selection in Models with Time-Varying Variance

• Main Authors: CHENG, Xu, PHILLIPS, Peter C. B.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Cointegrating rank; Heterogeneity; Information criteria; Model selection; Time varying variances; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1833; https://doi.org/10.1016/j.jeconom.2012.01.022
• Institution: Singapore Management University

Reduced rank regression (RRR) models with time varying heterogeneity are considered. Standard information criteria for selecting cointegrating rank are shown to be weakly consistent in semiparametric RRR models in which the errors have general nonparametric short memory components and shifting volatility provided the penalty coefficient Cn→∞ and Cnn→0 as n→∞. The AIC criterion is inconsistent and its limit distribution is given. The results extend those in Cheng and Phillips (2009a) and are useful in empirical work where structural breaks or time evolution in the error variances is present. An empirical application to exchange rate data is provided.