EFFICIENT LIKELIHOOD INFERENCE IN NONSTATIONARY UNIVARIATE MODELS

Abstract

Recent literature shows that embedding fractionally integrated time series models with spectral poles at the long-run and/or seasonal frequencies in autoregressive frameworks leads to estimators and test statistics with nonstandard limiting distributions. However, we demonstrate that when embedding such models in a general I(d) framework the resulting estimators and tests regain desirable properties from standard statistical analysis. We show the existence of a local time domain maximum likelihood estimator and its asymptotic normality—and under Gaussianity asymptotic efficiency. The Wald, likelihood ratio, and Lagrange multiplier tests are asymptotically equivalent and chi-squared distributed under local alternatives. With independent and identically distributed Gaussian errors and a scalar parameter, we show that the tests in addition achieve the asymptotic Gaussian power envelope of all invariant unbiased tests; i.e., they are asymptotically uniformly most powerful invariant unbiased against local alternatives. In a Monte Carlo study we document the finite sample superiority of the likelihood ratio test.I am grateful to Bent Jesper Christensen, Niels Haldrup, Pentti Saikkonen (the co-editor), and two anonymous referees for many useful comments and suggestions that significantly improved this paper. This work was done while the author was at the University of Aarhus, Denmark.