Cointegration Between Trends and Their Estimators in State Space Models and CVAR Models

Abstract

In a linear state space model Y(t)=BT(t) e(t), we investigate if the unobserved trend, T(t), cointegrates with the predicted trend, E(t), and with the estimated predicted trend, in the sense that the spreads are stationary. We find that this result holds for the spread B(T(t)-E(t)) and the estimated spread. For the spread between the trend and the estimated trend, T(t)-E(t), however, cointegration depends on the identification of B. The same results are found, if the observations Y(t), from the state space model are analysed using a cointegrated vector autoregressive model, where the trend is defined as the common trend. Finally, we investigate cointegration between the spread between trends and their estimators based on the two models, and find the same results. We illustrate with two examples and confirm the results by a small simulation study.