Challenges of Trending Time Series Econometrics
We discuss some challenges presented by trending data in time series econometrics. To the empirical economist there is little guidance from theory about the source of trend behavior and even less guidance about practical formulations. Moreover, recent proximity theorems reveal that trends are more elusive to model empirically than stationary processes, with the upshot that optimal forecasts are also harder to estimate when the data involve trends. These limitations are implicitly acknowledged in much practical modeling and forecasting work, where adaptive methods are often used to help keep models on track as trends evolve. The paper discusses these broader issues and limitations of econometrics and oﬀers some thoughts on new practical possibilities for data analysis in the absence of good theory models for trends. In particular, a new concept of coordinate cointegration is introduced and some new econometric methodology is suggested for analyzing trends and comovement and for producing forecasts in a general way that is agnostic about the speciﬁc nature of the trend process. Some simulation exercises are conducted and some long historical series on prices and yields on long securities are used to illustrate the methods.
Phillips, Peter C.B., "Challenges of Trending Time Series Econometrics" (2004). Cowles Foundation Discussion Papers. 1751.