Autoregressive Conditional Root Model
Nuffield College, Economics Working Paper No. 2002-W7
Posted: 19 Mar 2002
Date Written: February 14, 2002
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
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