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UNIT ROOT AND COINTEGRATING LIMIT THEORY WHEN INITIALIZATION IS IN THE INFINITE PAST

Published online by Cambridge University Press:  01 December 2009

Peter C.B. Phillips  and
Tassos Magdalinos
Peter C.B. Phillips*
Affiliation:
Yale University, University of Auckland, University of York and Singapore Management University
Tassos Magdalinos
Affiliation:
University of Nottingham
*
*Address correspondence to Peter C.B. Phillips, Department of Economics, Yale University, P.O. Box 208268, New Haven, CT 06520-8268; e-mail: peter.phillips@yale.edu.
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Abstract

It is well known that unit root limit distributions are sensitive to initial conditions in the distant past. If the distant past initialization is extended to the infinite past, the initial condition dominates the limit theory, producing a faster rate of convergence, a limiting Cauchy distribution for the least squares coefficient, and a limit normal distribution for the t-ratio. This amounts to the tail of the unit root process wagging the dog of the unit root limit theory. These simple results apply in the case of a univariate autoregression with no intercept. The limit theory for vector unit root regression and cointegrating regression is affected but is no longer dominated by infinite past initializations. The latter contribute to the limiting distribution of the least squares estimator and produce a singularity in the limit theory, but do not change the principal rate of convergence. Usual cointegrating regression theory and inference continue to hold in spite of the degeneracy in the limit theory and are therefore robust to initial conditions that extend to the infinite past.

Type
ARTICLES
Information
Econometric Theory , Volume 25 , Issue 6: Newbold Conference Special Issue , December 2009 , pp. 1682 - 1715
Copyright
Copyright © Cambridge University Press 2009

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