Estimating cointegrated panels with common factors and the forward rate unbiasedness hypothesis

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Abstract

This article proposes a bias-adjusted estimator for use in cointegrated panel regressions when the errors are cross-sectionally correlated through an unknown common factor structure. The asymptotic distribution of the new estimator is derived and is examined in small samples using Monte Carlo simulations. For the estimation of the number of factors, several information-based criteria are considered. The simulation results suggest that the new estimator performs well in comparison to existing ones. In our empirical application, we provide new evidence suggesting that the forward rate unbiasedness hypothesis cannot be rejected.

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Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • common factor model, forward rate unbiasedness hypothesis, cross-section dependence, panel cointegration, information criteria
Original languageEnglish
Pages (from-to)491-522
JournalJournal of Financial Econometrics
Volume5
Issue number3
Publication statusPublished - 2007
Publication categoryResearch
Peer-reviewedYes