Finite sample improvements in statistical inference with I(1) processes

Robinson and Marinucci (1998) investigated the asymptotic behaviour of a narrow-band semiparametric procedure termed Frequency Domain Least Squares (FDLS) in the broad context of fractional cointegration analysis. Here we restrict discussion to the standard case when the data are I(1) and the cointegrating errors are I(0), proving that modifications of the Fully Modified Ordinary Least Squares (FM-OLS) procedure of Phillips and Hansen (1990) which use the FDLS idea have the same asymptotically desirable properties as FM-OLS, and, on the basis of a Monte Carlo study, find evidence that they have superior finite-sample properties. The new procedures are also shown to compare satisfactorily with parametric estimates. Copyright © 2001 John Wiley & Sons, Ltd.