2024/10/14 by Mustafa R. Kılınç, Kılınç, Mustafa R., Michael Massmann +2
Economics, Econometrics and Finance · #Monetary Policy and Economic Impact
paper · pdf · doi:10.48550/arxiv.2410.10749
This paper introduces a test for fractional integration in a model that possibly contains smooth deterministic trends. We model the trend component using a Chebyshev polynomial and specify the short-run dynamics semi-parametrically, accommodating a broad class of possibly nonlinear processes, including those with conditional heteroskedasticity. We use a local Whittle approach for constructing a Lagrange multiplier test statistic and for constructing a frequency-domain information criterion for the selection of the order of the Chebyshev polynomial. We show that widely used time-domain information criteria are generally inconsistent for the true order, whereas our frequency-domain criterion remains robust under both short- and long-memory behaviour. Monte Carlo simulations and an empirical application to the UK Great Ratios support our theoretical findings.