Testing for codependence of cointegrated variables

Authors: Trenkler, Carsten¹; Weber, Enzo²

Source: Applied Economics, Volume 45, Number 15, 1 May 2013 , pp. 1953-1964(12)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

We analyse nonstationary time series that do not only trend together in the long run, but restore the equilibrium immediately in the period following a deviation. While this represents a common serial correlation feature, the framework is extended to codependence, allowing for delayed adjustment. We show which restrictions are implied for the Moving Average (MA) and Vector Error Correction Model (VECM) representations and put forward a Generalized Method of Moments (GMM) test. In addition, for cases where the constraints can be uniquely imposed on a VECM a likelihood ratio test is proposed. We apply the concept to US and European interest rate data, examining the capability of the Federal Reserve Bank (Fed) and European Central Bank (ECB) to control overnight money market rates.

Keywords: serial correlation common features; codependence; cointegration; overnight interest rates; central banks; C32; E52

Document Type: Research article

DOI: http://dx.doi.org/10.1080/00036846.2011.641931

Affiliations: 1: Center for Econometrics and Empirical Economics,University of Mannheim, L7, 3-5D-68131 Mannheim, Germany 2: Department of Economics and Econometrics,University of Regensburg, D-93040 Regensburg, Germany

Publication date: 2013-05-01

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