Title: Robust econometric inference in systems of cointegrating and predictive regressions
Authors: Tassos Magdalinos - University of Southampton (United Kingdom) [presenting]
Peter CB Phillips - Yale University (United States)
Abstract: Econometric methodology of inference in systems of cointegrating and predictive regressions is extended to accommodate time series with multiple persistence rates of unknown order. It is well known that conventional approaches to estimating cointegrating regressions fail to produce even asymptotically valid inference procedures when the regressors are nearly integrated, and substantial size distortions can occur in econometric testing. The new framework enables a general approach to inference that is robust to the persistence characteristics of the regressors, making it suitable for general practical application. Endogenously generated mildly integrated instruments are employed which eliminate the endogeneity problems of conventional cointegration methods and robustify inference to uncertainty over the nature of the integration in the system. The use of mildly integrated instruments also provides a mechanism for linking the conventional treatment of endogeneity in simultaneous equations with the econometric methodology for cointegrated systems. The methods are easily implemented, widely applicable and help to alleviate practical concerns about the use of cointegration methodology.