A STATISTICAL-ANALYSIS OF COINTEGRATION FOR I(2) VARIABLES

This paper discusses inference for I(2) variables in a VAR model. The estimation procedure suggested consists of two reduced rank regression s. The asymptotic distribution of the proposed estimators of the coint egrating coefficients is mixed Gaussian, which implies that asymptotic inference can be conducted using the chi2 distribution. It is shown t o what extent inference on the cointegration ranks can be conducted us ing the tables already prepared for the analysis of cointegration of I (1) variables. New tables are needed for the test statistics to contro l the size of the tests. This paper contains a multivariate test for t he existence of I(2) variables. This test is illustrated using a data set consisting of U.K. and foreign prices and interest rates as well a s the exchange rate.