Representation of Cointegrated Autoregressive Processes with Application to Fractional Processes

Abstract

We analyze vector autoregressive processes using the matrix valued characteristic polynomial. The purpose of this article is to give a survey of the mathematical results on inversion of a matrix polynomial in case there are unstable roots, to study integrated and cointegrated processes. The new results are in the I(2) representation, which contains explicit formulas for the first two terms and a useful property of the third. We define a new error correction model for fractional processes and derive a representation of the solution.