Testing and Estimation of Structural Breaks in Fractional Cointegration

• Applicant: Professor Dr. Philipp Sibbertsen
• Subject Area: Statistics and Econometrics
• Term: since 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 452510572

The aim of the project is to develop and empirically apply tests for time-varying partial fractional cointegration. If one interprets a fractional cointegration relationship as a long-term stable equilibrium, it can be assumed that this also changes with changing economic and political conditions. The change can be that the cointegration vector changes over time, but the actual equilibrium relationship is stable, or that fractional cointegration is only present at specific times. Both have not been considered by the literature so far, so that the aim of this project is to develop methods that test for such temporal changes in the cointegration relationship and then allow them to be modeled and interpreted.On the one hand, the test for fractional cointegration by Hassler and Breitung (2006) is combined with approaches by Davidson and Monticini (2010) to allow for breaks in the cointegration relationship. On the other hand, a likelihood ratio-based approach is used which tests for multiple structural breaks in the cointegration vector in a cointegrated multivariate time series system.Furthermore, the aim of this project is to see whether the occurrence of fractional cointegration relationships is driven by a background variable. In order to do this the cointegration residuals are modeled as a Markov switching process.With the help of these theoretical methods, the relationship between fractional cointegration and market integration in the Eurozone is examined. It is considered which economic knowledge can be gained by applying these methods to the correlation between equity and bond yields (so-called “flight-to-quality” effects), as well as to dependency structures between the volatilities of different asset classes, and to international financial market volatilities .

• DFG Programme: Research Grants