Multicointegration and Present Value Relations

Memo 1995-13

Posted: 23 Aug 1998

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Jesús Gonzalo

Universidad Carlos III de Madrid - Department of Statistics and Econometrics; Aarhus University - Department of Economics

Niels Haldrup

Aarhus University, School of Economics and Management; CREATES

Abstract

It is well-known that if the forcing variable of a present value (PV) model is an integrated process, then the model will give rise to a particular cointegrating restriction. In this paper we demonstrate that if the PV relation is exact, such that no additive error term appears in the specification, then the variables will be multicointegrated such that the cumulation of cointegration errors at one level of cointegration will cointegrate with the forcing variable. Multicointegration thus delivers a statistical property of the data that is necessary, though not sufficient, for this class of models to be valid. Estimation and inference of the model are discussed and it is shown that provided the PV relation is exact the discount factor of the model can be estimated with a rate of convergence that is faster than the usual super-consistent rate characterizing estimators in the cointegration literature. Finally, the paper is completed with two empirical analyses of PV models using term structure data and farmland data, respectively.

JEL Classification: C19

Suggested Citation

Engsted, Tom and Gonzalo Muñoz, Jesús and Haldrup, Niels, Multicointegration and Present Value Relations. Memo 1995-13. Available at SSRN: https://ssrn.com/abstract=6798

Tom Engsted

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Jesús Gonzalo Muñoz

Universidad Carlos III de Madrid - Department of Statistics and Econometrics ( email )

c/ Madrid 126
Getafe (Madrid), 28903
Spain
34 + 91 624 9853 (Phone)
34 + 91 624 9849 (Fax)

Aarhus University - Department of Economics

University Park
DK-8000 Aarhus C
Denmark

Niels Haldrup (Contact Author)

Aarhus University, School of Economics and Management ( email )

Universitetsparken
Aarhus, DK 8000 C
Denmark
+45 8942 1133 (Phone)
+45-8613-6334 (Fax)

CREATES ( email )

School of Economics and Management
Aarhus University
Aarhus, DK 8000 C
Denmark
+4589421613 (Phone)

HOME PAGE: http://www.creates.au.dk/en

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