Estimation of Fractional Arima Models for the Uk Unemployment
نویسنده
چکیده
Financial support from ESRC grant number L116251013, Macroeconomic Modelling and Policy Analysis in a Changing Word is gratefully acknowledged. The usual disclaimer applies. Fractional integrated ARMA (ARFIMA) models are investigated in this article for different measures of the UK unemployment. The analysis is carried out using the Sowell (1992) procedure of estimating by maximum likelihood in the time domain. A crucial fact when estimating with parametric approaches is that the model must be correctly specified. Otherwise the estimates are liable to be inconsistent. A model-selection procedure based on diagnostic tests on the residuals, along with several likelihood criterions is adopted to determine the correct model specification of each series. The results suggest that the UK unemployment may be well described as an ARFIMA model, with the order of integration fluctuating between 1 and 2. Thus, the standard approach of taking first differences to get I(0) stationary series may lead to mistaken conclusions, with the differenced series showing a strong component of long memory behaviour.
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