Challenges of Trending Time Series Econometrics

21 Pages Posted: 27 Jul 2004

See all articles by Peter C. B. Phillips

Peter C. B. Phillips

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

Date Written: July 2004

Abstract

We discuss some challenges presented by trending data in time series econometrics. To the empirical economist there is little guidance from theory about the source of trend behavior and even less guidance about practical formulations. Moreover, recent proximity theorems reveal that trends are more elusive to model empirically than stationary processes, with the upshot that optimal forecasts are also harder to estimate when the data involve trends. These limitations are implicitly acknowledged in much practical modeling and forecasting work, where adaptive methods are often used to help keep models on track as trends evolve. The paper discusses these broader issues and limitations of econometrics and offers some thoughts on new practical possibilities for data analysis in the absence of good theory models for trends. In particular, a new concept of coordinate cointegration is introduced and some new econometric methodology is suggested for analyzing trends and comovement and for producing forecasts in a general way that is agnostic about the specific nature of the trend process. Some simulation exercises are conducted and some long historical series on prices and yields on long securities are used to illustrate the methods.

Keywords: Coordinate instrumental variables, coordinate reduced rank regression, coordinate trend functions, limitations of econometrics, nonstationarity, trend

JEL Classification: C10, C50, C87

Suggested Citation

Phillips, Peter C. B., Challenges of Trending Time Series Econometrics (July 2004). Available at SSRN: https://ssrn.com/abstract=569348

Peter C. B. Phillips (Contact Author)

Yale University - Cowles Foundation ( email )

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University of Auckland ( email )

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University of Southampton

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Singapore Management University - School of Economics

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Singapore

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