Bayesian Cointegration Analysis.

This paper proposes Bayesian estimation of cointegrated VAR systems and a simple method of estimating the cointegration rank using the Bayes factors for the adjustment term. Monte Carlo experiments show that the method proposed is more powerful in selecting the rank, especially with a small sample size, than Johansen's LR test. This is due to the fact that Bayesian analysis uses the exact distributions instead of relying on asymptotic distribution theory. The method proposed here is relatively easy to implement. Over-identifying restrictions on the cointegrating vectors are also considered.