Title: Cointegration in large VARs
Authors: Anna Bykhovskaya - University of Wisconsin - Madison (United States) [presenting]
Vadim Gorin - University of Wisconsin-Madison (United States)
Abstract: Cointegration in vector autoregressive processes (VARs) is analyzed for the cases when both the number of coordinates $N$ and the number of time periods $T$ are large and of the same order. We propose a way to examine a VAR for the presence of cointegration based on a modification of the Johansen likelihood ratio test. The advantage of our procedure over the original Johansen test and its finite sample corrections is that our test does not suffer from over-rejection. This is achieved through novel asymptotic theorems for eigenvalues of matrices in the test statistic in the regime of proportionally growing $N$ and $T$. Our theoretical findings are supported by Monte Carlo simulations and an empirical illustration.