No CrossRef data available.
Published online by Cambridge University Press: 22 April 2005
Let α* be any basis of col(Π) and β* be any basis of col(Π′); we note col(α⊥) = col(α*⊥), col(β⊥) = col(β*⊥) so no distinction is made between α⊥ and α*⊥, β⊥ and β*⊥ in the following discussion.
Let α* be any basis of col(Π) and β* be any basis of col(Π′); we note col(α⊥) = col(α*⊥), col(β⊥) = col(β*⊥) so no distinction is made between α⊥ and α*⊥, β⊥ and β*⊥ in the following discussion.
1. Condition (b) is equivalent to rank(α⊥′ β⊥) = s < p − r; this implies that

has dimension p2 := p − r − s. Because

, one has that p2 ≤ r.
2. Condition (b) can be written as α⊥′ β⊥ = ξη′, with ξ, η (p − r) × s full column rank matrices; α⊥ can thus be chosen as follows:

where a is r × p2, p2 ≤ r, b := (b1′ : b2′)′ is p × s, and q is of full column rank. The matrix α⊥′ β⊥ becomes

so that ξ = (0 : Ip2)′ and η = b2; thus β1 = β⊥ b2, β2 = β⊥ b2⊥, α1 = α⊥(0 : Ip2)′, α2 = α⊥(Is : 0)′ = β* a.
Using orthogonal projections, one can represent α* as α* = (β*,β⊥)c; from α⊥′α = 0 one deduces that c = q⊥, where c = q⊥ can be chosen as follows:

where v is a nonsingular square matrix and ω := −(b2′(β⊥′ β⊥)−1b2)−1b1′ a⊥. Note that the second block of columns is equal to β2 = β⊥κ, where we have named κ := b2⊥.
Now let α := (β* a⊥ + β1ω : β2) and define β′ := α′Π; because β and β* are two bases of col(Π′), they are related by the relation βu = β* for a nonsingular matrix u. Substituting within α one finds α := (βφ + β1ω : β2) with φ := ua⊥ of full column rank. Summarizing, the coefficients (α,β,Ω) are constrained as follows:

where β1 = β⊥κ⊥, β2 = β⊥κ. The I(2) model is thus indexed by the parameters τ := (β, κ, φ, ω, Ω), which are freely varying.
3. From the I(2) representation theorem of Johansen (1992), one finds that δ := α′β2. By (1) one sees that δ = (0,Ip2)′, which is full rank p2. Let β1 := β(Ir−p2 : 0)′ and β2 := β(0,Ip2)′; one sees that β1′Xt are the CI(2,2) relations and β2′Xt + (β2′ β2)−1β2′ΔXt are the multicointegrating relations.
4. By the I(2) representation theorem of Johansen (1992), C2 = β2(α2′θβ2)−1α2′, where θ := (I + βα′). The choice β is by construction conformable with α := (βφ + β1ω : β2). Going back to the representation of α2 one finds β* = β(u′)−1 and thus α2 = β* a = βφ⊥, where we note that (u′)−1a = φ⊥. Thus α2′θβ2 = φ⊥′ β′(I + βα′)β2 = φ⊥′ β′βα′β2 = φ⊥′ β′βδ, given the structure (1) of α, and hence

Note that C2 depends on β, κ, φ and it does not depend on ω, Ω.
5. The likelihood function depends on τ through the product αβ′ and Ω. Specifically αβ′ = (βφ + β1ω)β1′ + β⊥κβ2′, where β = (β1 : β2) is partitioned conformably with α. It is simple to see that τ is not identified because one can insert two square invertible matrices φi, i = 1,2, and their inverses within the two factors in αβ′; i.e., τ := (β, κ, φ, ω, Ω) and τ* := (βφ′, κφ2−1, (φ′)−1 φφ1−1, ωφ1−1, Ω) give the same likelihood, where φ := diag(φ1,φ2). Moreover because β⊥, β1 are any bases of col(β⊥) and col(β1), one also needs to identify them.
For any matrix γ, let a be of the same dimensions such that a′γ is nonsingular; define γa := γ(a′γ)−1 (see, e.g., Johansen, 1996, ch. 5). To achieve identification one can identify β1, β2, β⊥, and β1 by defining βa11, βa22, β⊥a3, and β1a4 for appropriate matrices ai, i = 1,2,3,4. This solves the identification problem for τ.