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Asymmetric adjustment and bias in estimation of an equilibrium relationship from a cointegrating regression

journal contribution
posted on 2006-05-30, 10:27 authored by Sean Holly, Paul Turner, Melvyn Weeks
This paper uses Monte Carlo methods to investigate the effects of asymmetric adjustment on estimates of the parameters of the equilibrium relationship between a set of variables.We demonstrate that simple least squares estimates and the implicit estimates from a symmetric error correction model both lead to biases in the constant term. This bias increases with the size of the asymmetry and shows no tendency to decline with the sample size. We also show that if the biased estimates of the equilibrium relationship are then used to devide the sample into different regimes to test for assymmetric adjustment, then the resulting test has low power. The power of tests for asymmetry can be increased significantly by using simultaneous estimation of the parameters of the equilibrium relationship and the asymmetric adjustment process.

History

School

  • Business and Economics

Department

  • Economics

Pages

73650 bytes

Citation

HOLLY, S.,TURNER, P.and WEEKS, M., 2003. Asymmetric adjustment and bias in estimation of an equilibrium relationship from a cointegrating regression. Computational Economics, 21, pp.195-202.

Publisher

© Kluwer (Springer)

Publication date

2003

Notes

This is Restricted Access. The article was published in the journal, Computational Economics [© Springer] and is available at: http://www.springerlink.com/openurl.asp?genre=journal&issn=0927-7099

ISSN

0927-7099

Language

  • en

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