Functional Cointegration: Definition and Nonparametric Estimation.
Paper 1205
Authors: Jean-Yves Pitarakis (University of Southampton) & Anurag Banerjee (Durham University)
Absract
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.