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Functional cointegration: definition and nonparametric estimation

Pitarakis, Jean-Yves (2012): Functional cointegration: definition and nonparametric estimation.

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Abstract

We formally define a concept of functional cointegration linking the dynamics of two time series via a functional coefficient. This is achieved through the use of a concept of summability as an alternative to I(1)'ness which is no longer suitable under nonlinear dynamics. We subsequently introduce a nonparametric approach for estimating the unknown functional coefficients. Our method is based on a piecewise local least squares principle and is computationally simple to implement. We establish its consistency properties and evaluate its performance in finite samples.

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