The current practice for determining the number of linearly independent coi
ntegrating vectors, or the cointegrating rank, in a vector autoregression (
VAR) requires the investigator to perform a sequence of cointegration tests
. However, as was shown in Johansen (1992), this type of sequential procedu
re does not lead to consistent estimation of the cointegrating rank. Moreov
er, these methods take as given the correct specification of the lag order
of the VAR, though in actual applications the true lag length is rarely kno
wn. Simulation studies by Toda and Phillips (1994) and Chao (1995), on the
other hand, have shown that test performance of these procedures can be adv
ersely affected by lag misspecification.
This paper addresses these issues by extending the analysis of Phillips and
Ploberger (1996) on the Posterior Information Criterion (PIC) to a partial
ly nonstationary vector autoregressive process with reduced rank structure.
This extension allows lag length and cointegrating rank to be jointly sele
cted by the criterion, and it leads to the consistent estimation of both. I
n addition, we also evaluate the finite sample performance of PIC relative
to existing model selection procedures, BIC and AIC, through a Monte Carlo
study. Results here show PIC to perform at least as well and sometimes bett
er than the other two methods in all the cases examined. (C) 1999 Elsevier
Science S.A. All rights reserved.