Bayesian Estimation of Optimal Differencing Operator in Cointegrated Systems

• Activity Number: 281 - Advances in Time Series Methodology
• Type: Topic Contributed
• Date/Time: Tuesday, August 1, 2017 : 8:30 AM to 10:20 AM
• Sponsor: Business and Economic Statistics Section
• Author(s): Anindya Roy* and Tucker McElroy
• Companies: University of Maryland at Baltimore County and U. S. Census Bureau
• Keywords: Causality ; Invertibility ; Vector Autoregression

Abstract

Vector autoregressive (VAR) models are common multivariate time series models that are flexible enough to model a variety of processes. Often VAR systems are cointegrated with some linear combinations of the time series resulting in pure unit-root processes while other linear combinations resulting in causal autoregressive processes. To analyze such processes users may work with the differenced time series. However, differencing all series equally results in some linear combinations that are over-differenced and hence non-invertible processes. Non-invertible processes are problematic to deal in terms of long-term forecasting. We use a factorization of the VAR operator along with priors that are constrained to the factor space to estimate an optimal differencing operator that when applied to the original series produces invertible processes.