Practical Problems with Reduced-Rank Ml Estimators for Cointegration Parameters and a Simple Alternative

18 Pages Posted: 5 Nov 2005

See all articles by Ralf Brüggemann

Ralf Brüggemann

University of Konstanz - Department of Economics

Helmut Luetkepohl

European University Institute; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

Johansen's reduced-rank maximum likelihood (ML) estimator for cointegration parameters in vector error correction models is known to produce occasional extreme outliers. Using a small monetary system and German data we illustrate the practical importance of this problem. We also consider an alternative generalized least squares (GLS) system estimator which has better properties in this respect. The two estimators are compared in a small simulation study. It is found that the GLS estimator can indeed be an attractive alternative to ML estimation of cointegration parameters.

Suggested Citation

Brüggemann, Ralf and Luetkepohl, Helmut, Practical Problems with Reduced-Rank Ml Estimators for Cointegration Parameters and a Simple Alternative. Oxford Bulletin of Economics & Statistics, Vol. 67, No. 5, pp. 673-690, October 2005, Available at SSRN: https://ssrn.com/abstract=814162

Ralf Brüggemann (Contact Author)

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany

Helmut Luetkepohl

European University Institute ( email )

Villa San Paulo
Via della Piazzola 43
I-50133 Firenze
Italy
+39 055 4685 971 (Phone)
+39 055 4685 902 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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