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Autoregressive Transformations in Cointegrated Regressions

Robert McNown1,2; Myles Wallace3

1 University of Colorado Boulder · 2 University of Colorado System · 3 Clemson University

The Review of Economics and Statistics 1997

Standard autocorrelation corrections applied to cointegrating regressions can lead to erroneous first-differencing. Such outcomes are shown to be possible under a range of environments, including cases with autocorrelation coefficients substantially less than 1. First-differencing of a cointegrating regression results in estimates that may bear little relation to the parameters in the original untransformed relation, resulting in misinterpretation of the parameter estimates. These results are proved analytically and demonstrated with simulations and empirical examples.

DOI
10.1162/003465300556913
Volume
79 (3)
Pages
503-507
Language
en
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