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HOW TO ESTIMATE AUTOREGRESSIVE ROOTS NEAR UNITY

Published online by Cambridge University Press:  07 February 2001

Peter C.B. Phillips
Affiliation:
Yale University, University of Auckland, and University of York
Hyungsik Roger Moon
Affiliation:
University of Southern California
Zhijie Xiao
Affiliation:
University of Illinois at Urbana-Champaign

Abstract

A new model of near integration is formulated in which the local to unity parameter is identifiable and consistently estimable with time series data. The properties of the model are investigated, new functional laws for near integrated time series are obtained that lead to mixed diffusion processes, and consistent estimators of the localizing parameter are constructed. The model provides a more complete interface between I(0) and I(1) models than the traditional local to unity model and leads to autoregressive coefficient estimates with rates of convergence that vary continuously between the O(√n) rate of stationary autoregression, the O(n) rate of unit root regression, and the power rate of explosive autoregression. Models with deterministic trends are also considered, least squares trend regression is shown to be efficient, and consistent estimates of the localizing parameter are obtained for this case also. Conventional unit root tests are shown to be consistent against local alternatives in the new class.

Type
Research Article
Copyright
© 2001 Cambridge University Press

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