Codependence in cointegrated autoregressive models

This paper investigates codependent cycles, i.e., transitory components that react to common stimuli in a similar, although not necessarily synchronous fashion. Unlike previous studies, the methodology of this paper allows FIML estimation of the restricted VAR/VECM and therefore the extraction of the unobserved codependent cyclical components via a Beveridge-Nelson decomposition. It is further shown that the number and order of cofeature combinations that yield the scalar component models associated with codependence is limited by the dimension of a finite-order VAR system. Monte Carlo simulations indicate that LR tests based on FIML estimates have higher power than alternative GM[M[ and canonical correlations tests, while maintaining good size properties. An empirical application investigates the presence of codependence in UK consumption data. Copyright (c) Bank of England.