Time-varying cointegration, identification, and cointegration spaces

• Main Author: Martins, L. F.
• Publication Date: 2013
• Other Authors: Gabriel, V. J.
• Format: Article
• Language: eng
• Source: Repositórios Científicos de Acesso Aberto de Portugal (RCAAP)
• Download full: https://ciencia.iscte-iul.pt/public/pub/id/15045; http://hdl.handle.net/10071/7336
• topic: Time-varying cointegration; Cointegration spaces; Identification

We derive the conditions under which time-varying cointegration leads to cointegration spaces that may be time-invariant or, in contrast, time-varying. The model of interest is a vector error correction model with arbitrary time-varying cointegration parameters. We clarify the role of identification and normalization restrictions and show that structural breaks in error-correction models may actually correspond to stable long-run economic relationships, as opposed to a single-equation setup, in which an identification restriction is imposed. Moreover, we show that, in a time-varying cointegrating relationship with a given number of variables and cointegration rank, there is a minimum number of orthogonal Fourier functions that most likely guarantees time-varying cointegrating spaces.