Cointegrating Rank Selection in Models with Time-Varying Variance

28 Pages Posted: 21 Jan 2009

See all articles by Xu Cheng

Xu Cheng

University of Pennsylvania - Department of Economics

Peter C. B. Phillips

University of Auckland Business School; Yale University - Cowles Foundation; Singapore Management University - School of Economics

Date Written: October 11, 2008

Abstract

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 C_{n}-> infinity and C_{n}/n -> 0 as n -> infinity. The AIC criterion is inconsistent and its limit distribution is given. The results extend those in Cheng and Phillips (2008) 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.

Keywords: Cointegrating rank, Consistency, Heterogeneity, Information criteria, Model selection, Nonparametric, Time varying variances, Unit roots

JEL Classification: C22, C32

Suggested Citation

Cheng, Xu and Phillips, Peter C. B., Cointegrating Rank Selection in Models with Time-Varying Variance (October 11, 2008). Cowles Foundation Discussion Paper No. 1688, Available at SSRN: https://ssrn.com/abstract=1330437

Xu Cheng

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.sas.upenn.edu/~xucheng/

Peter C. B. Phillips (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand
+64 9 373 7599 x7596 (Phone)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3695 (Phone)
203-432-5429 (Fax)

Singapore Management University - School of Economics

90 Stamford Road
178903
Singapore

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