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Yanping Yi Publications

Publish Date
Journal of Econometrics
Abstract

This paper considers estimation of short-run dynamics in time series that contain a nonstationary component. We assume that appropriate preliminary methods can be applied to the observed time series to separate short-run elements from long-run slowly evolving secular components, and focus on estimation of the short-run dynamics based on the filtered data. We use a flexible copula-generated Markov model to capture the nonlinear temporal dependence in the short-run component and study estimation of the copula model. Using the rescaled empirical distribution of the filtered data as an estimator of the marginal distribution, Chen et al. (2022) proposed a simple, yet flexible, two-step estimation procedure for the copula model. The two-step estimator works well when the tail dependence is small. However, simulations reveal that the two-step estimator may be biased in finite samples in the presence of tail dependence. To improve the performance of short-term dynamic analysis in the presence of tail dependence, we propose in this paper a pseudo sieve maximum likelihood (PSML) procedure to jointly estimate the residual copula parameter and the invariant density of the filtered residuals. We establish the root-consistency and asymptotic distribution of the PSML estimator of any smooth functional of the residual copula parameter and invariant residual density. We further show that the PSML estimator of the residual copula parameter is asymptotically normal, with the limiting distribution independent of the filtration. Simulations reveal that in the presence of strong tail dependence, compared to the two-step estimates of Chen et al. (2022), the proposed PSML estimates have smaller biases and smaller mean squared errors even in small samples. Applications to nonstationary macro-finance and climate time series are presented.