Autoregressive Conditional Root Model

Nuffield College, Economics Working Paper No. 2002-W7

Posted: 19 Mar 2002

See all articles by Anders Rahbek

Anders Rahbek

University of Copenhagen - Department of Statistics and Operations Research; University of Copenhagen - Department of Economics

Neil Shephard

Harvard University

Date Written: February 14, 2002

Abstract

In this paper we develop a time series model which allows long-term disequilibriums to have epochs of non-stationarity, giving the impression that long term relationships between economic variables have temporarily broken down, before they endogenously collapse back towards their long term relationship. This autoregressive root model is shown to be ergodic and covariance stationary under some rather general conditions. We study how this model can be estimated and tested, developing appropriate asymptotic theory for this task. Finally we apply the model to assess the purchasing power parity relationship.

Keywords: Cointegration, Equilibrium correction model, GARCH, Hidden Markov model, Likelihood, Regime switching, STAR model, Stochastic break, Stochastic unit root, Switching regression, Real Exchange Rate, PPP, Unit root hypothesis

Suggested Citation

Rahbek, Anders and Shephard, Neil, Autoregressive Conditional Root Model (February 14, 2002). Nuffield College, Economics Working Paper No. 2002-W7. Available at SSRN: https://ssrn.com/abstract=300714

Anders Rahbek

University of Copenhagen - Department of Statistics and Operations Research

Universitetsparken 5
DK-2100
Denmark
+45 3532 0682 (Phone)

University of Copenhagen - Department of Economics

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Neil Shephard (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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