BY
2002
http://cowles.econ.yale.edu/
Econometrica, Vol. 70, No. 3 (May, 2002), 1067–1109
Band spectral regression with both deterministic and stochastic trends is considered. It
is shown that trend removal by regression in the time domain prior to band spectral regres
sion can lead to biased and inconsistent estimates in models with frequency dependent
coefﬁcients. Both semiparametric and nonparametric regression formulations are consid
ered, the latter including general systems of twosided distributed lags such as those aris
ing in lead and lag regressions. The bias problem arises through omitted variables and is
avoided by careful speciﬁcation of the regression equation. Trend removal in the frequency
domain is shown to be a convenient option in practice. An asymptotic theory is developed
and the two cases of stationary data and cointegrated nonstationary data are compared.
In the latter case, a levels and differences regression formulation is shown to be useful in
estimating the frequency response function at nonzero as well as zero frequencies.
1 introduction
Hannan’s (1963a, b) bandspectrum regression procedure is a useful
regression device that has been adopted in some applied econometric work,
notably Engle (1974), where there are latent variables that may be regarded as
frequency dependent (like permanent and transitory income) and where there is
reason to expect that the relationship between the variables may depend on fre
quency. More recently, band spectral regression has been used to estimate coin
tegrating relations, which describe low frequency or long run relations between
economic variables. In particular, Phillips (1991a) showed how frequency domain
regressions that concentrate on a band around the origin are capable of pro
ducing asymptotically efﬁcient estimates of cointegrating vectors. Interestingly,
in that case the spectral methods are used with nonstationary integrated time
series in precisely the same way as they were originally designed for stationary
series, on which there is now a large literature (see, inter alia, Hannan (1970 Ch.
VII), Hannan and Thomson (1971), Hannan and Robinson (1973), and Robinson
(1991)). Related methods were used in Choi and Phillips (1993) to construct fre
quency domain tests for unit roots. In all of this work, the capacity of frequency
domain techniques to deal nonparametrically with short memory components in
1
Our thanks go to a coeditor and three referees for helpful comments. An early draft was written
in the summer of 1994. The ﬁrst complete version of the paper was written over the period 1 January–
1 July 1997 while Phillips was visiting the University of Auckland. Lemmas A–D are due to Phillips
and are taken from other work to make this paper self contained. Phillips thanks the NSF for research
support under Grant Nos. SBR 9422922, SBR 9730295, and SES 0092509.
1067
1068 d. corbae, s. ouliaris, and p. c. b. phillips
the data is exploited. Robinson (1991), who allowed for band dependent model
formulations, showed how, in such semiparametric models, data based methods
can be used to determine the smoothing parameter that plays a central role in
the treatment of the nonparametric component. Other data based methods have
been used directly in the study of cointegrating relations and testing problems by
Xiao and Phillips (1998, 1999).
To the extent that relations between variables may be band dependent, it is
also reasonable to expect that causal relations between variables may vary accord
ing to frequency. Extending work by Geweke (1982), both Hosoya (1991) and
Granger and Lin (1995) have studied causal links from this perspective and con
structed measures of causality that are frequency dependent. Most recently, fre
quency band methods have been suggested for the estimation of models with long
memory components (e.g., Marinucci (1998), Robinson and Marinucci (1998),
Kim and Phillips (1999)), where salient features of the variables are naturally
evident in frequency domain formulations.
This paper studies some properties of frequency band regression in the pres
ence of both deterministic and stochastic trends, a common feature in economic
time series applications. In such cases, a seemingly minor issue relates to the
manner of deterministic trend removal. In particular, should the deterministic
trends be eliminated by regression in the time domain prior to the use of the
frequency domain regression or not? Since spectral regression procedures were
originally developed for stationary time series and since the removal of deter
ministic trends by least squares regression is well known to be asymptotically
efﬁcient under weak conditions (Grenander and Rosenblatt (1957, p. 244)), it
may seem natural to perform the trend removal in the time domain prior to the
use of spectral methods. Indeed, this is recommended in Hannan (1963a, p. 30;
1970, pp. 443–444), even though the development of spectral regression there
and in Hannan (1970, Ch. VII.4) allows for regressors like deterministic trends
that are susceptible to a generalized harmonic analysis, satisfying the socalled
Grenander conditions (Grenander and Rosenblatt (1957, p. 233), Hannan (1970,
p. 77)). Theorem 11 of Hannan (1970, p. 444) conﬁrms that such time domain
detrending followed by spectral regression is asymptotically efﬁcient in models
where all the variables are trend stationary and where the model coefﬁcients do
not vary with frequency.
In time domain regression, the Frisch–Waugh (1933) theorem assures invari
ance of the regression coefﬁcients to prior trend removal or to the inclusion
of trends in the regression itself. Such invariance is often taken for granted in
empirical work. However, as will be shown here, invariance does not always
apply for bandspectrum regression when one switches from time domain to fre
quency domain regressions. In particular, detrending by removing deterministic
components in the time domain and then applying bandspectrum regression is
not necessarily equivalent to detrending in the frequency domain and applying
bandspectrum regression. The reason is that a band dependent spectral model
is similar in form to a linear regression with a structural change in the coefﬁ
cient vector. So, when there are deterministic trends in the model, the original
band spectral regression 1069
(1) xt = %2
zt + x̃t
with f((
fxx
> 0 ∀ .
with f((
fvv
> 0 ∀.
Assumptions 1 and 2 sufﬁce for partial sums of *t to satisfy the functional law
−1/2
nr
d
n t=1 *t → B r
= BM
, a vector Brownian motion of dimension k + 1
and
(( 0
=
0 xx
where xx > 0, so that x̃t is a full rank vector I(1) process. In all cases, x̃t is taken
to be independent of (t . This amounts to a strict exogeneity assumption when we
introduce a generating mechanism for a dependent variable yt . The assumption
is standard for consistent estimation in the stationary case (as in Hannan (1963a,
b)). In the nonstationary case, it is not required for the consistent estimation of
band spectral regression 1071
, the
most common case in practice, although we anticipate that our conclusions about
bias and inconsistency will apply more generally, for instance to trigonometric
polynomials, after some appropriate extensions of our dft formulae in Lemma A
and the limit results in Lemma C below. Let 5n = diag 1 n np
, and deﬁne
dt = 5−1
n zt . Then
(2) dnr = 5−1 p
n znr
→ u r
= 1 r r
(3) ỹt = :
j x̃t−j + (t = : L
x̃t + (t
j=−
where the transfer function of the ﬁlter, b
= : ei
= ij
j=− :j e , is assumed
to converge for all ∈ −" "
. Under stationarity (Assumption 1), the cross
spectrum fyx
between ỹt and x̃t satisﬁes
(4) fyx
= b
fxx
(5) : = b −
= fxx
−1 fxy
(6) : L
= : ei
+ :̃ e−i L
e−i L − 1
where
: eik j ≥ 0
k=j+1 k
j
:̃ L
= :̃j L :̃j =
j
j=−
− :k eik j < 0
k=−
2
with j=− :̃j < . Using (6) in (3) we have
(7) ỹt = : L
x̃t + (t
= b
+ :̃ e−i L
e−i L − 1
x̃t + (t
= b
x̃t + e−i L − 1
ãt + (t
wx̃ s
+ w( s
+ √ e−is ãs 0 − ãs n
n
For stationary x̃t ãt is also stationary and (8) can be written as
1
(9) wỹ s
= b s
wx̃ s
+ w( s
+ Op √
n
giving an approximate frequency domain version of (3).
The case of integrated x̃t (Assumption 2) can be handled in a similar way.
Here it is useful to apply to (3) the twosided BN decomposition at unity (part(a)
of Lemma D), viz.
(10) : L
= : 1
+ :̃ L
L − 1
where
:k j ≥ 0
j k=j+1
:̃ L
= :̃j L :̃j =
j
j=−
− :k j < 0
k=−
(11) ỹt = : 1
x̃t + (t − :̃ L
vt = : 1
x̃t + (˜ t say
band spectral regression 1073
which is a cointegrating equation between ỹt and x̃t with cointegrating vector
1 −: 1
and composite error (˜ t = (t − :̃ L
vt . Setting <t = :̃ L
vt and taking
the dft of (11), we obtain
(12) wỹ s
= : 1
wx̃ s
+ w( s
− w< s
(13) = b s
wx̃ s
+ w( s
− w< s
+ : 1
− b s
wx̃ s
The ﬁnal two terms of (13) are important, revealing that the approximation (9)
fails in the nonstationary case and has an error of speciﬁcation that arises from
omitted variables.
Assuming it is valid, the spectral BN decomposition of :̃ L
at frequency s is
≈
:̃ L
= :̃ eis
+ :s e−is L
e−is L − 1
≈
where :s is constructed as in Lemma D(b). Then
1
(14) w< s
= :̃ eis
wv s
+ √ e−is ṽs 0 − ṽs n
n
1
= :̃ eis
wv s
+ Op √
n
≈
where ṽs t =:s e−is L
vt is stationary. It follows that (12) has the form
is
1
(15) wỹ s
= : 1
wx̃ s
− :̃ e
wv s
+ w( s
+ Op √
n
giving an approximate frequency domain version of the cointegrated model that
applies for all frequencies. Since vt = 1x̃t , it is apparent from (15) that if data on
ỹt and x̃t were available, the equation could be estimated in the frequency domain
by band spectral regression of wỹ s
on wx̃ s
and w1x̃ s
for frequencies s
centered around some frequency . For s centered around = 0, this procedure
was suggested originally in Phillips (1991b) and Phillips and Loretan (1991),
where it is called augmented frequency domain regression, although in that work
deterministic trends were excluded. In the general case where s is centered on
= 0, we can recover the spectral coefﬁcient : = b −
from the coefﬁcients
: 1
and :̃ eis
= :̃ e−is
∗ in (15) using the fact that
(16) b −
= : e−i
= : 1
+ :̃ e−i
e−i − 1
dynamic regressions like (11) arise and where they have been used in regres
sion analysis to obtain efﬁcient estimates of the cointegrating vector (Phillips and
Loretan (1991), Saikonnen (1991), Stock and Watson (1993)).
The mechanism linking the observed dependent variable yt to zt and ỹt (and,
hence, x̃t , and (t ) is now given by
(17) yt = z
t "1 + ỹt
(18) b
= :A 1 ∈ A
+ :Ac 1 ∈ cA
> 0
responses ina regression context. The coefﬁcients :j in the Fourier
representation, b
= ij
j=− :j e , of (18) are
: A 0 : A c
+ " − 0
j = 0
1 " −ij " "
(19) :j = b
e dw =
2" −"
sin j0
:A − :Ac
j = 0
"j
so that the ﬁlter in (3) is symmetric and twosided. This is an interesting case
where the coefﬁcients :j decay slowly and do not satisfy the sufﬁcient condition
1
− j
2 : < given in Lemma D for the validity of the BN decomposition of
j
: L
= j
j=− :L . Nevertheless, the BN decomposition of : L
is still valid in
this case, as shown in Remark (i) following Lemma D in the Appendix.
While data for ỹt can be generated by (3) and (19) by truncating the ﬁlter, an
alternate frequency domain approach that uses (18) is possible. This mechanism
has the advantage of revealing the impact of the shift in (18) in terms of a stan
dard regression model with a structural change. Like xt , the dependent variable
yt is assumed to have both deterministic and stochastic components. Its stochas
tic component ỹt is generated from x̃t and (t by means of a triangular array
formulation which we explain as follows.
Let X = x̃1 x̃n
be the n × k matrix of observations of the exogenous
√
regressors x̃t , let U be the n × n unitary matrix with j k
element e2"ijk/n / n,
and let W = E1n U , where
0 1
E1n =
In−1 0
with
s = k − 1.
We introduce the following matrices that are used to provide a frequency
dependent structure to the model for yt . Deﬁne:
• A = n × n selector matrix that zeroes out frequencies in W X that are not
c
relevant to the primary band of interest, say A . Then, A W = I − A
W extracts
the residual frequencies over cA . Note that Ac A = AAc = 0.
• A = W ∗ AW and A c = W ∗ Ac W = I − A .
Then, for each n, ỹ = ỹ1 ỹn
is generated in the frequency domain in dft
form by the system
(20) A + AW(
AW ỹ = AW X:
(21) Ac + Ac W(
Ac W ỹ = Ac W X:
where ( = (1 (n
with the ﬁnal term of (8) omitted. In the stationary case, this omitted term is
1
Op n− 2
as seen in (9), so the difference between the generating mechanisms
is negligible asymptotically. In the nonstationary case, however, the omitted term
is nonnegligible, as is apparent from (13) and (15). In consequence, the two gen
erating mechanisms differ in the nonstationary case and this leads to a difference
in the asymptotic theory between the two models that will ﬁgure in our discus
sion in Section 5.
Adding (20) and (21) and multiplying by W ∗ gives
(22) A + A c X:
ỹ = A X: Ac + (
which is the time domain generating mechanism for ỹ. By construction, the matri
ces A and A c have elements that depend on n, and it follows that ỹt # t =
1 n has a triangular array structure, although we do not emphasize this by
using an additional subscript and we will have no need of triangular array limit
theory in our asymptotic development.
In (22), (t x̃t
satisﬁes Assumption 1 in the stationary case and (t 1x̃t
sat
isﬁes Assumption 2 in the nonstationary case. Thus, (22) is a variable (band
dependent) coefﬁcient time series regression with exogenous regressors and sta
tionary errors under Assumption 1, and a cointegrating regression with exoge
nous regressors and band dependent coefﬁcients under Assumption 2. Note that
model (22) is semiparametric: parametric in the regression coefﬁcients :A and
:Ac and nonparametric in the regression errors (.
We now suppose that the observed series yt has deterministic components like
xt in (1) and is related to the unobserved component ỹt by means of
Using (22) and (23), it follows that the observed data satisfy the model
(24) y = Z "1 − %2 :A
+ X:A + A c Z%2 :A − :Ac
− A c X :A − :Ac
+ (
or, equivalently,
or
(26) y = A Z "1 − %2 :A
+ A c Z "1 − %2 :Ac
+ A X:A + A c X:Ac + (
These models extend (22) to cases where the observed data contain deterministic
trends. Observe that the trend regressors zt now appear in the model with band
dependent coefﬁcients, just like the exogenous regressors xt .
The formulations (24)–(26) make it clear that detrending the data in the time
domain is not a simple matter of applying the projection matrix QZ , as might
be expected immediately from (1) and (23). In fact, correct trend removal is
accomplished by the use of the operator QV = I − PV , where V = Z A c Z
or,
band spectral regression 1077
y = Z "1 − %2 :
+ X: + (
(27) :̂A = X
QZ A QZ X
−1 X
QZ A QZ y
with a corresponding formula for :̂Ac , the estimator over the band cA . In form
ing :̂A and :̂Ac , the data are ﬁltered by a trend removal regression via the projec
tion QZ before performing the bandspectrum regression. This procedure follows
Hannan’s (1963a, b) recommendation for dealing with deterministic trends and,
as we have discussed in the introduction, is the conventional approach in this
context. Using (24) and (27), we ﬁnd
(28) :̂A = :A + X
QZ A QZ X−1 X
QZ A QZ A c Z%2 :A − :Ac
− A c X :A − :Ac
+ (
A − :Ac
− (
= :A − X
QZ A QZ X−1 X
QZ A QZ A c X :
= :A − X −1 X
QZ A QZ X A − :Ac
− (
QZ A QZ A c X :
It follows that
(30) A − :Ac
E :̂A X
= :A − X
QZ A QZ X−1 X
QZ A QZ A c X :
and
Ac − :A
E :̂Ac X
= :Ac − X
QZ A c QZ X−1 X
QZ A c QZ A X :
1078 d. corbae, s. ouliaris, and p. c. b. phillips
The asymptotic theory for the narrow band estimates :̂ and :̃ is developed
in Section 5.
e − 1 e − 1 j=1 j
s s
with initialization
n
is t n s = 0
(36) W0 s
= e =
t=1 0 s = 0
k
Using (35), the standardized quantities W k s
= √1n nt=1 nt eis t satisfy the
recursion
1 eis 1 k
1 k
(37) W k s
= √ i + i −1
j W k−j s
n e s − 1 e s − 1 j=1 nj j
1 n
wd s
= √ dt eis t = W 0 s
W p s
n t=1
The main cases of interest are low order polynomials, where explicit expres
sions for the discrete Fourier transforms W k s
are easily obtained from
Lemma A. Thus, when k = 0 1 2 we have
√
n s = 0
(38) W 0 s
=
0 s = 0
n+1
s = 0
2n1/2
(39) W 1 s
=
eis
1
s = 0
n1/2 eis − 1
n + 1
2n + 1
s = 0
6n3/2
(40) W 2 s
=
1 eis 2 eis
− s = 0
n1/2 eis − 1 n3/2 eis − 1
2
1080 d. corbae, s. ouliaris, and p. c. b. phillips
In case (38), it is apparent that eliminating the zero frequency will demean
the data and leave the model unchanged for s = 0. Then, A c Z = 0 and so
=0
A QZ A c = A A c − A Pz A c = 0, and QZ = QV . It follows that X
QZ A QZ A c X
in (30) and therefore :̂A is unbiased in this case of simple data demeaning.
On the other hand, when z
t = 1 t
and dt
= 1 t/n
, it follows from (38) and
(39) that
√ n + 1
n 1/2 s = 0
1 n
2n
(41) wd s
= √ dt
eis t =
n t=1 eis
0 1
s = 0
n1/2 eis − 1
and the second component of wd s
has nonzero elements for s = 0. Hence,
A c Z = 0 and QZ = QV , so that :̂A is biased in this case. The same applies
for higher order trends.
Frequencies in the band cA satisfy s > 0 > 0. It therefore follows from
1
Lemma A and (37) that W k s
= O n− 2
uniformly for s ∈ cA . Hence,
(42) wd s
= O n−1/2
for all s ∈ cA
and, thus, A c D = W ∗ Ac WD has elements that are of O n−1/2
.
= :A + X
W ∗ AQAWZ AWX
−1 X
W ∗ AQAWZ AW(
band spectral regression 1081
f
Clearly, E :̂A X
= :A , and the estimator is unbiased. A similar result holds for
f
the corresponding estimator :̂Ac of :Ac .
In this frequency domain approach to detrending, the so called Frisch–Waugh
f
(1933) theorem clearly holds, i.e., the regression coefﬁcient :̂A on the variable
AWX in (43) is invariant to whether the regressor AWZ is included in the regres
sion or whether all the data have been previously detrended in the frequency
domain by regression on AWZ.
Following (32), the natural narrow band approach is to use an augmented
regression model that includes the dft of the trend in the regression, viz.
(45) wy s
= c̃1 wx s
+ c̃2 w1x s
+ c̃3 wz s
+ residual
for frequencies s centered on . This narrow band regression leads to the estimate
f
c̃1 − − e−i − 1
c̃2 − = 0
(46) :̃ =
c̃10 = 0
similar to (34).
5 asymptotic theory
We derive a limit distribution theory for the detrended band spectral regres
sion estimates and consider what happens to the bias as n → . We start by
introducing some notation and making the framework for the limit theory more
precise.
We start with the parametric case where there are the two discrete bands
A and Ac . Let na = #s ∈ A and nc = #s ∈ Ac be the number of
fundamental frequencies in the bands A and Ac . It is convenient to subdivide
−" "
into subbands j of equal width (say, "/J ) that center on frequencies
j = "j/J # j = −J + 1 J − 1. Let m = # s ∈ j
and suppose that Ja of
these bands lie in A . It follows that n and na can be approximated by n = 2mJ
and na = 2mJa , respectively.
In the nonparametric case, we focus on a single frequency and consider a
shrinking band of width "/J centered on . Again, we let m = # s ∈
.
The following condition will be useful in the development of the asymptotics
and will be taken to hold throughout the remainder of the paper. Additional
requirements will be stated as needed.
For the bias in :̂A to vanish asymptotically, the deviation that depends on the
term
A − :Ac
X
QZ A QZ X−1 X
QZ A QZ A c X :
1082 d. corbae, s. ouliaris, and p. c. b. phillips
where
−1
−1
(48) Va = fxx
d 2" fxx
f((
d fxx
d
A A A
f
with an analogous result for :̂Ac and :̂Ac .
In the stationary case, therefore, the bias in band spectral regression from time
domain detrending disappears as n → and there is no difference between the
two bands A and cA in terms of the limit theory. It is therefore irrelevant
whether the main focus of interest is high or low frequency regression. The form
of the asymptotic covariance matrix Va is a band spectral version of the familiar
sandwich formula for the robust covariance matrix in least squares regression.
Va can be estimated by replacing the spectra in the above formula with cor
responding consistent estimates and averaging over the band A . For the full
band case where A = −" "
, the matrix Va is the well known formula for the
asymptotic covariance matrix of the least squares regression estimator in a time
series regression (c.f. Hannan (1970, p. 426)). A formula related to Va was given
in Hannan (1963b, equation (16)) for band spectral estimates in the context of
models with measurement error.
A similar result holds in the nonparametric case, but with a different conver
gence rate.
band spectral regression 1083
Theorem 1
(Nonparametric Case): If x̃t and (t are zero mean, stationary,
and ergodic time series satisfying Assumption 1, and ỹt is generated by (3), non
parametric band spectral regression with detrending in the time domain or in the
frequency domain is consistent for : = b −
. The common limit distribution of
f
:̂ and :̂ is given by
√ √ d
m :̂ − :
m :̂f − :
→ Nc 0 V
where
V = f((
fxx
−1
Note that in (49) the moment matrices are standardized by n2 , because the data
nonstationarity is manifest in bands like A that include the zero frequency. Over
frequency bands like cA that exclude the zero frequency the rate of convergence
of the moment matrices is slower and the bias in :̂Ac will disappear when
−1
X
Q Z A c QZ X X
QZ A c QZ A X p
(50) → 0
n n
1
(52) wx̃ s
= w
+ w nt s
x̃n − x̃0
1 − eis v s
from which it is clear that frequency domain detrending (i.e., using residuals from
regressions of the frequency domain data on wt/n s
or wd s
) will remove the
second term of (51) and thereby eliminate the common leakage from the low
frequency.
d 1
(d) n−1/2 s ∈cA wx̃ s
wd s
∗ → − 2" Bx 1
c ei f1
∗ / 1 − ei
d
d
1
A
(e) n−1 s ∈cA wx̃ s
wx̃ s
∗→ c fxx
+ 2" 1/ 1−ei 2
Bx 1
Bx 1
d
d
A
(f) n−1 s ∈cA wxd s
wxd s
∗ → c fxx
+ 2"
−1 g Bx
g Bx
∗ d
d
A
1
(g) n−1/2 s ∈cA wxd s
wd s
∗ → − 2" cA
g Bx
f1
∗ d
1
(h) s ∈cA wd s
wd s
∗ → 2" cA 1
f
f1
∗ d
1
(i) n−1 s ∈A wd s
wd s
∗ → 0 uu
d 1
(j) n−2 s ∈0 wx̃ s
wx̃ s
∗ → 0 Bx Bx
d 1
(k) n−2 s ∈0 wxd s
wxd s
∗ → 0 Bxu Bxu
1 ∗
1
(l) n s ∈0 wd s
wd s
→ 0 uu
d 1
(m) n−3/2 s ∈0 wx̃ s
wd s
∗ → 0 Bx u
(n) n/m
s ∈ wd s
wd s
∗ → f1
f1
∗ = 0
√ d
(o) nm−1 s ∈ wx̃ s
wd s
∗ → ei / 1 − ei
B 1
f1
∗ = 0
band spectral regression 1085
where fxx
= 1 − ei −2 fvv
, f1
= 0 ei / ei − 1
for = 0, and
1
1
−1
Bxu r
= Bx r
− Bx u uu u r
0 0
and
1
1
−1
ei
g Bx
= B 1
+ B u uu f1
1 − ei x 0
x
0
(53) n :̂A − :A
→ Bxu Bxu Bxu dB(
0 0
1
−1
and
d
(54) :̂Ac → :Ac − G −1  :Ac − :A
where
G= 2"fxx
+ g Bx
g Bx
∗
d
cA
and
−1
1 1
∗
(55) = g Bx
f1
d uu uBx
cA 0 0
When fxx
= 1/2"
1 − ei −2 (i.e., when vt is iid(0, 1)), a simple calculation
reveals that the probability limit (54) of :̂Ac simpliﬁes to
−1
1 1 2 1 2 −1 1
0
B x r 0
r − B x 1
0
r 0
B x r
(56) :Ac + :A − :Ac
−1 2
1 1 2
1 + Bx 1
− 0 Bx r 0
r
So, in this case, the bias is not dependent on the width of the band :Ac .
The following theorem gives the corresponding results for the nonparametric
estimators :̂ and :̃ .
Theorem 2
: Suppose (t x̃t
satisﬁes Assumption 2 and ỹt is generated by (11)
where : L
and :̃ L
both have valid BN decompositions.
(a) For = 0,
1 −1 1 1
d
(57) n :̂0 − :0
→ Bxu Bxu Bxu dB( − Bxu dBx + 1x :̃ 1
0 0 0
where :0 = : 1
and 1x = j=− E v0 vj
.
For = 0,
(58) :̂ →d : + 2"G−1 fxx
− 1 :̃ e−i
e−i − 1
where : = : e−i
= b −
,
G = 2"fxx
+ g Bx
g Bx
∗
and fxx
= 1 − ei −2 fvv
.
(b) For = 0,
d
1 −1 1
n :̃0 − :0
→ Bxu Bxu Bxu dB(
0 0
For = 0,
√ f((
m :̃ − :
→d Nc 0
fxx
1
(59) n :̂A − :A → Bxu Bxu Bxu dB(
0 0
and
−1
√ f d
(60) n :̂Ac − :Ac → N 0 fxx
d 2" fxx
f((
d
cA cA
−1
× fxx
d
cA
Theorem 3
: Under the conditions of Theorem 2
, at = 0
−1
f d 1
1
n :̃0 − :0 → Bxu Bxu Bxu dB(
0 0
and for = 0
√ f d
(61) m :̃ − : → Nc 0 f((
fxx
−1
1088 d. corbae, s. ouliaris, and p. c. b. phillips
f f
So, :̂A and :̃0 are consistent and have the same mixed normal limit distribution
as that of :̂A in (53). The limit distribution makes asymptotic inference about :A
and :0 straightforward, using conventional regression Wald tests adjusted in the
usual fashion so that a consistent estimate of the spectrum of (t is used (based
on regression residuals) in place of a variance estimate.
f f
The frequency domain detrended estimators :̂Ac and :̂ are also consistent,
unlike the time detrended estimator :̂ = 0
in the nonstationary case. The
f
limit distribution of :̂Ac is the same as it is in the case of trend stationary regres
√ f
√ (Theorem 1) and has the same n rate. The nonparametric estimator :̃ is
sors
m consistent and is asymptotically equivalent to the augmented regression esti
mator :̃ . As far as the model (11) is concerned, it is therefore apparent from
Theorems 2
and 3
that if the correct augmented regression model is used in
estimation, it does not matter asymptotically whether detrending is done in the
time domain or the frequency domain.
6 conclusion
It is natural to eliminate deterministic trends in the time domain by simple least
squares regression because the Grenander–Rosenblatt (1957, p. 244) theorem
shows that such regression is asymptotically efﬁcient when the time series are
trend stationary (although this conclusion does not hold when there are stochas
tic as well as deterministic trends—see Phillips and Lee (1996)). In a similar way,
it seems natural to eliminate deterministic trends in band spectral regressions by
detrending in the time domain prior to the use of spectral methods because these
methods were originally intended for application to stationary time series. How
ever, this paper shows that such time domain detrending will lead to biased coef
ﬁcient estimates in models where the coefﬁcients are frequency dependent. In
models that have both deterministic and stochastic trends, time domain detrend
ing can lead to inconsistent estimates of the coefﬁcients at frequency bands away
from the origin. The inconsistency, which arises from omitted variable effects,
can be substantial and has been conﬁrmed in simulations that are not reported
here (Corbae, Ouliaris, and Phillips (1997)).
The bias and inconsistency arise from omitted variable misspeciﬁcation and
are managed by use of an appropriate augmented regression model. The situa
tion is analogous to a structural break model, but here the coefﬁcients change
across frequency rather than over time. An alternate approach that is suitable in
practice is to model the data and run regressions, including detrending regres
sions, in the frequency domain. In effect, discrete Fourier transforms of all the
variables in the model, including the deterministic trends, are taken and band
regression is performed. When nonparametric estimation is being conducted, the
same principle is employed but one uses a shrinking band that is local to a par
ticular frequency. In the nonstationary case, it turns out to be particularly impor
tant to specify the model in terms of levels and differences as in (15) leading to
the ﬁtted regressions (32) and (45). An estimate of the frequency response coef
ﬁcient at a particular frequency is then recovered from a linear combination of
band spectral regression 1089
the coefﬁcients in the regression as in (34) and (46). This approach, which can
be regarded as a frequency domain version of leads and lags dynamic regression,
provides a convenient single equation method of estimating a long run relation
ship in the presence of deterministic trends and short run dynamics.
APPENDIX
1
Lemma D (Two Sided BN Decompositions): If C L
= j=− cj L
j
and j=− j cj <
2
then:
(a) C L
= C 1
+ C̃ L
1 − L
, where C L
= j
j=− c̃j L , with
c j ≥ 0
k=j+1 k
c̃j =
j
− ck j < 0
k=−
w L
= c̃wj Lj with
w e−iw L
e−iw L − 1
where C
(b) C L
= C eiw
+ C j=−
c eikw j ≥ 0
k=j+1 k
c̃wj =
j
ck eikw j < 0
−
k=−
Proof of Lemma D: The proof is along the same lines as the proof in Phillips and Solo (1992,
Lemma 2.1) of the one sided BN decomposition.
1
(62) j 2 cj <
j=−
is sufﬁcient for (a) and (b) and ensures that 2
j=− c̃j < but it is not necessary for the latter. For
j
instance, the series : L
= j=− :j L , whose coefﬁcients :j are given by (19), fails (62) but still has
a valid BN decomposition with 2
j=− :̃j < . To see this, let cj = eijx /j and then :j is a constant
times the imaginary part of cj . Deﬁne Sn = nj=1 eijx = eix / eix − 1
einx − 1
. Partial summation gives
n
eijx 1 eix n
ei j−1
x − 1
Pn = = Sn + ix
j=1
j n e − 1 j=2 j j − 1
It follows that
Sn S m eix n
ei j−1
x − 1
Pn − P m = − + ix
n m e − 1 j=m+1 j j − 1
(63)
C L
= C 1
+ C L
1
− L
2 C L
= c̃˜j Lj
j=−
where
c̃ j ≥ 0
k=j+1 k
≈
c=
j
j
− c̃k j < 0
k=−
1 3
A sufﬁcient condition for the validity of (63) is j=− j 2 c̃j < or j=− j 2 cj < in terms
of the original coefﬁcients.
Proof of Lemma A: Part (a) is well known (e.g., Gradshteyn and Ryzhik (1965, formula
0.121)). For part (b) we use partial summation to give
n
n
k i t
n
1 t k eis t = 1t e s + t − 1
k 1eis t
t=1 t=1 t=1
k
n
k k−j n
= − t −1
eis t + t − 1
k eis t−1
eis − 1
j
t=1 j=1
j t=1
or
k
n
k k−j n
nk = − t −1
j eis t + t − 1
k eis t−1
eis − 1
t=1 j=1
j t=1
we get
k
n
k is t
is
k
is
k
n
k k−j
t e e −1 = n e −1 +n − − t −1
eis t
j
s = 0
2
W1 s
=
is
n e
s = 0
eis − 1
n n + 1
2n + 1
s = 0
6
W2 s
=
eis 2
n n − i s = 0
eis − 1 e s −1
and
2
n n + 1
s = 0
2
W3 s
= is
n e
1 1
eis − 1 n − 3 n − 1
is +6
2
2 s =
0
e −1 eis − 1
Proof of Theorem 1: This follows standard lines and is omitted (see Corbae, Ouliaris, and
Phillips (1997)).
Proof of Theorem 1
: First, observe that
(64) :̂ = m−1 X −1 m−1 X
QZ A Q Z X
QZ A QZ ỹ
1
(65) wỹ s
= b s
wx̃ s
+ w( s
+ √ e−is ãs 0 − ãs n
n
1
(66) = b
wx̃ s
+ w( s
+ Op √
n
in the stationary case. We now ﬁnd that
(67)
QZ A QZ X
m−1 X = m−1 wx̃ s
wx̃ s
∗ + op 1
→p 2"fxx
s ∈
(68)
QZ A QZ ỹ = m−1 X
m−1 X
A ỹ + op 1
= m−1 wx̃ s
wx̃ s
∗ b −
+ m−1 wx̃ s
w( s
∗ + op 1
s ∈ s ∈
1092 d. corbae, s. ouliaris, and p. c. b. phillips
)
for dft’s of stationary processes and are independently distributed2 as n → . It follows from this
result and (67) that
(70) m−1/2 wx̃ s
w( s
∗ →d Nc 0 2"
2 f((
fxx
s ∈
which leads to the stated limit theorem for :̂ . A similar argument gives the result for :̂f .
n
wx̃ S
= n−1/2 x̃t−1 eis t + wv s
= eis wx̃ s
− n−1/2 eis n x̃n − x̃0 + wv s
t=1
Proof of Lemma C: Part (a)# This result may be proved as in Phillips (1991a). A new and
substantially simpler proof uses part (e) and is as follows.
n−2 wx̃ s
wx̃ s
∗ = n−2 wx̃ s
wx̃ s
∗ − n−2 wx̃ s
wx̃ s
∗
s ∈A s ∈−" "
s ∈c
A
n
= n−2 x̃t x̃t
+ Op n−1
t=1
d
1
→ Bx Bx
0
= n n + 1
/2n1/2 , so that n−1/2 wd 0
→ 1 21 =
1
f0 = 0 u , and
1 eis 1
wd s
= 0 1/2 i −1 = √ f1 s
s = 0
n e s n
It follows that as n →
√
n
(72) wd s
= 0 1 + o 1
2"si
2
Hannan (1973, Theorem 3) showed that a ﬁnite collection of w( s
satisfy a central limit theorem
and are independent. Here the collection s ∈ has m members and is asymptotically inﬁnite.
Phillips (2000, Theorem 3.2) showed that an asymptotically inﬁnite collection of w( s
satisfy a
central limit theorem and are asymptotically independent for frequencies s in the neighborhood of
1 1
the origin provided the number of frequencies m = o n− 2 + p
where E (t p
< for some p > 2,
i.e., provided the number of frequencies does not go to inﬁnity too fast. This result can be extended
to frequency bands away from the origin, although a proof was not given in that paper.
band spectral regression 1093
a formula that holds for both s ﬁxed and for s → with s/n
→ 0. On the other hand, when
s → = 0 as n → we have
1 ei 1 1 1
(73) wd s
= √ 0 i +o √ = √ f1
+ o √
n e −1 n n n
Write the summation over A as follows: s ∈A = s ∈−" "
− s ∈Ac . Then
n−3/2 wx̃ s
wd s
∗ = n−3/2 wx̃ s
wd s
∗ − n−3/2 wx̃ s
wd s
∗
s ∈A s ∈−" "
s ∈Ac
= n−3/2 wx̃ s
wd s
∗ − n−2 wx̃ s
f1 s
∗
s ∈−" "
s ∈Ac
First,
1 eis x̃n − x̃0
n−2 wx̃ s
f1 s
∗ = n−2 wv s
− f1 s
∗
s ∈Ac s ∈Ac
1−e s
i 1−e s n
i 1/2
= Op n−1
Second,
n
n−3/2 wx̃ s
wd s
∗ = n−2 x̃t eis t wd s
∗
s ∈−" "
t=1 s ∈−" "
n n
x̃
= n−3/2 x̃t dt
= n−1 √t dt
t=1 t=1 n
d
1
→ Bx r
u r
dr
0
It follows that
d
1
n−3/2 wx̃ s
wd s
∗ → Bx r
u r
dr
s ∈A 0
nr
→ Bx r
− u r
uu
uBx
= Bxu r
0 0
Then
1 d
1
wxd s
wxd s
∗ →
Bxu Bxu
n2 s ∈A 0
as in part (a).
Part (d)# From Lemma B we have
1 eis x̃n − x̃0
wx̃ s
= w
−
1 − eis v s 1 − eis n1/2
d
As in the proof of part (b), we have n−1/2 x̃n → Bx 1
, and, if s → = 0 as n → ,
d 1 ei
wx̃ s
→ Nc 0 2"fvv
− N 0 2"fvv 0
1−e i 1 − ei
f
+ fvv 0
= Nc 0 2" vv
1 − ei 2
1094 d. corbae, s. ouliaris, and p. c. b. phillips
It follows that
n−1/2 wx̃ s
wd s
∗ = n−1 wx̃ s
f1 s
∗
s ∈c s ∈c
A A
is
1 x̃ − x̃
e
= n−1 wJ s
f1 s
∗ − n−1 n 1/2 0 f
∗
s ∈c
1−e s
i n ∈c 1 − eis 1 s
A s A
so that
ei f
∗
d 1 1
(74) term II → − Bx 1
d
2" c
A
1 − ei
1 1 1 x̃n x̃n
= w
w
∗ + 1/2 + op 1
2J Ja ≤j≤J
m s ∈ 1 − eis 2 v s v s n n1/2
j
1 1 1 x̃n x̃n
= ij 2
2" fˆvv j
+ n−1 + op 1
2J Ja ≤j≤J 1 − e s ∈c
1 − eis 2 n1/2 n1/2
A
d
fvv
1 1
→ d + d Bx 1
Bx 1
c
A
1 − e
i 2 2" cA 1 − ei 2
as required. In the penultimate line above, 2" fˆvv j
= 1/m
s ∈j wJ s
wJ s
∗ and fˆvv
−
fvv
→p 0.
Part (f)# Note that
(75)
wxd s
∗ = wx̃ s
∗ − wd s
∗ n−1 D
D
−1 n−1 D
X
→ N c 0 2"f JJ
− B x 1
− f 1
uu uB x
1 − e−i 1 − e−i 0 0
1
= N 0 2"fJJ
− g Bx
∗ say
1 − e−i c
when s → = 0 as n → . Here
1
1
−1
ei
g Bx
= B x 1
+ B x u uu f1
1 − ei 0 0
band spectral regression 1095
1 d 2"fJJ
2" fˆxxd j
= w
w
∗ → + g Bx
g Bx
∗
m s ∈ xd s xd s 1 − ei 2
j
= 2"fxx
+ g Bx
g Bx
∗
We deduce that
1 1
n−1 wxd s
wxd s
∗ = w
w
∗ + op 1
s ∈c
2J Ja ≤j≤J
m s ∈ xd s xd s
A j
1
= 2" fˆxxd j
+ op 1
2J Ja ≤j≤J
d
→ fxx
+ 2"
−1 g Bx
g Bx
∗ d
c
A
s ∈c s ∈c
A A
d
∼ −n−1 g s Bx
f1 s
∗
s ∈c
A
d 1 2"
∼− g s Bx
f1 s
∗
2" n ∈c
s A
d 1
→− g Bx
f1
∗ d
2" cA
as stated.
Part (h)# From (73) we have
1 1
wd s
wd s
∗ ∼ f1 s
f1 s
∗ → f
f1
∗ d
s ∈c
n ∈c 2" cA 1
A s A
as required.
Part (i)# Using part (h), we get
n−1 wd s
wd s
∗ = n−1 wd s
wd s
∗ + Op n−1
s ∈A s ∈−" "
n
= n−1 dt eis t wd s
∗ + Op n−1
t=1 s ∈−" "
−1
n
=n dt dt
+ Op n−1
t=1
1
→ u r
u r
dr
0
−2
=n wx̃ s
wx̃ s
∗
s ∈−" "
1 ∗ x̃n x̃n
+ Op w v s
w v s
+
n≥s≥J
s2 n1/2 n1/2
n
d
1
= n−2 x̃t x̃t
+ op 1
→ Bx Bx
t=1 0
Part (k)# In the same way as parts (j) and (c) we ﬁnd that
n
d
1
n−2 wxd s
wxd s
∗ = n−2 x̃d t x̃
d t + op 1
→
Bxu Bxu
s ∈0 t=1 0
1
Part (l)# From part (b) we have n−1/2 wd 0
→ f0
= 1 21 = 0 u
and, for s = 0 with s/n
→ 0,
√
we have wd s
= 0 n/2"si
1 + o 1
from (72). Thus, for = 0, we ﬁnd that
1 1 1
w
w
∗ = wd 0
wd 0
+ w
w
∗
n s ∈ d s d s n n s ∈ −0 d s d s
0 0
0 0
1
2
= wd 0
wd 0
+ 1 m 1
n 0 2 s=1
2" s2
1
0 0
→ f0 f0
+ 1 = uu
0 12 0
n
= n−3/2 x̃t dt
− op 1
t=1
d
1
→ Bx r
u r
dr
0
since
1
n−3/2 wx̃ s
wd s
∗ = Op w
s 0
nm s x̃ s
0
x̃n −x̃0
1 wv s
− eis √
n
= Op
nm s 1 − eis
0
= op 1
d ei
→ B 1
f1
∗
1 − ei
Finally, joint weak convergence in (a)–(o) applies because the component elements jointly converge
and one may apply the continuous mapping theorem in a routine fashion. In particular, Assumptions 1
and 2 ensure that
nr
d
n−1/2 *t
wv
→ B r

with  = Nc 0 2"fvv
t=1
QZ A QZ X
:̂A − :A = −X
QZ A QZ A c X :
−1 X A − :Ac
− (
nr
→ Bx r
− u r
uu
uBx
= Bxu r
say
0 0
= 1 d 1
(77)
QZ A Q Z X
n−2 X wxd s
wxd s
∗ →
Bxu Bxu
n2 s ∈A 0
1
QZ A Q Z A c X
X
QZ W ∗ AWPZ W ∗ Ac W X
X X
QD W ∗ AWPD W ∗ Ac W X
(78) =− −
n n n
X
PD W ∗ AWPD W ∗ Ac W X
X
W ∗ AWPD W ∗ Ac W X
= −
n n
= term A − term B
Take each of these terms in turn. Factor term A as follows and consider each factor separately. Write
X
PD W ∗ AWPD W ∗ Ac W X
X
PD W ∗ AWD
D
D
−1 D
W ∗ Ac W X
(79) =
n n3/2 n n1/2
1098 d. corbae, s. ouliaris, and p. c. b. phillips
in view of (76) and Lemma C(i). The third factor is the conjugate transpose of
(81)
W ∗ Ac WD = n−1/2
n−1/2 X wx̃ s
wd s
∗
s ∈c
A
ei f
∗
d 1 1
→− Bx 1
d
2" c
A
1 − ei
from Lemma C(d). The limit of term A now follows by combining (81) and (80) and using joint weak
convergence:
PD W ∗ AWPD W ∗ Ac W X
X
PD W ∗ AWD D
D
−1
n−1/2 X
(82) =
D
W ∗ Ac W n−1/2 X
n n n
1 1
−1
d 1 e−i f1
→ Bx u
uu
− d B x 1
0 0 2" c
A
1 − e−i
W ∗ AWPD W ∗ Ac W X
X
(83)
n
−1
1 −1/2 DD
= n wx̃ s
wd s
∗ n−1/2 wd s
wx̃ s
∗
n s ∈
n ∈c
A s A
−1
d 1 1 1 e−i f1
→ Bx u
uu
− dB x 1
0 0 2" c
A
1 − e−i
(84)
QZ A Q Z A c X
n−1 X = op 1
d
1
(86)
QZ A Q Z X
n−2 X →
Bxu Bxu = G
0
3
By changing the probability space (on which the random sequence x̃t is deﬁned), we can ensure
that both terms tend almost surely to the same random variable (see, for example, Theorem 4,
page 47 of Shorack and Wellner (1986)). Then, in the original space the difference of the terms tends
in distribution to zero giving the stated result.
band spectral regression 1099
−1 X
p
QZ A Q Z A c X
X QZ A Q Z X
(87) → 0
n2 n
Next,
QZ A Q Z (
X 1
(88) = n−1 wxd s
w(d s
∗ = w
w
∗
n s ∈A
n s ∈ xd s ( s
A
−1
1 ∗ D
D D(
− w xd s
w d s
√
3
n 2 s ∈A n n
Then, using (76) and proceeding as in the proof of Lemma C(a) above, we ﬁnd
(89) n−1 wxd s
w( s
∗ = n−1 wxd s
w( s
∗ − n−1 wxd s
w( s
∗
s ∈A s ∈−" "
s ∈Ac
n
d
1
= n−1 x̃d t (t − op 1
→ Bxu dB(
t=1 0
−1
1 D
D D
( d 1 1 1
(90) wxd s
wd s
∗ √ → Bxu u
uu
u dB( = 0
n
3
2 s ∈A n n 0 0 0
1
since 0
Bxu u
= 0. Combining (88), (89), and (90), we deduce that
QZ A Q Z ( d 1
X
(91) → Bxu dB(
n 0
1
The limit distribution (91) is a mixture normal distribution with mixing matrix variate 0
Bxu Bxu .
It now follows from (86) and (91) that
QZ A Q Z ( d 1
−1 X
−1 1
X QZ A Q Z X
≡ MN 0 2"f(( 0
Bxu Bxu
0
1
−1 1
d
n :̂A − :A
→ Bxu Bxu Bxu dB(
0 0
For the limit of :̂Ac , we need to examine the asymptotic behavior of the bias term in (29), which
depends on the matrix quotient n−1 X
QZ A c QZ X
−1 n−1 X
QZ A c QZ A X
.
Take each of these fac
tors in turn. First,
X
QZ A c QZ X
QD A c QD X
X
= = n−1 wxd s
wxd s
∗
n n ∈c s A
QZ A c QZ A X
n−1 X
Q Z A c PZ A X
= −n−1 X = −n−1 X
Q D A c PD A X
= − n−1/2 wxd s
wd s
∗ n−1 D
D
−1 n−3/2 wd s
wx̃ s
∗
s ∈c s ∈A
A
It follows from (93) and (94) and joint weak convergence that the asymptotic bias term for :̂Ac
involves
QZ A c QZ X
n−1 X −1 n−1 X
QZ A c QZ A X
−1
d
→ 2"fxx
+ g Bx
g Bx
∗ d
c
A
1
−1 1
× g Bx
f1
∗ d uu
uBx
c 0 0
A
Proof of Theorem 2
: Part (a)# From (64) and (11) we have
(95) :̂ = : 1
+ X −1 X
QZ A QZ X QZ A QZ (˜
Since (˜ t is a strictly stationary and ergodic sequence with mean zero and satisﬁes a central limit
theorem, n−1 D
D
−1 n−1 D
(
˜ = Op n−1/2
, and so
p
(96) (˜
t − z
t n−1 Z
Z
−1 n−1 Z
(
˜ = (˜
t − z
t 5−1 −1
−1 −1
n n D D
n D (
˜ → (˜
t
Then, since :̃ L
has a valid BN decomposition,
(97)
QZ A QZ (˜ = n−1
n−1 X wx̃d s
w(˜ s
∗ + op 1
s ∈
= n−1 wx̃d s
w( s
∗ − n−1 wx̃d s
wv s
∗ :̃ e−is
+ op 1
s ∈ s ∈
band spectral regression 1101
d
1
(98) n−1 wx̃d s
w( s
∗ → Bxu dB(
s ∈0 0
and
d
1
(99) n−1 wx̃d s
wv s
∗ → Bxu dBx
+ 1x
s ∈0 0
where 1x = j=− E v0 vj
. We deduce that
1
1
d
(100)
QZ A QZ (˜ →
n−1 X Bxu dB( − Bxu dBx
+ 1x :̃ 1
0 0
d
1
(101)
QZ A QZ X
n−2 X →
Bxu Bxu
0
n :̂0 − : 1
wx̃ s
− :̃ eis
wv s
+ w( s
+ Op √
n
Now
(104) wyd s
∗ = wỹ s
∗ − wd s
∗ n−1 D
D
−1 n−1 D
ỹ
Bx r
= By r
∗ −is
− wv s
:̃ e
+ op 1
= wxd s
: 1
− wv s
∗ :̃ e−is
+ w( s
∗ + op 1
∗
Then
(109)
QZ A QZ ỹ = m−1
m−1 X wxd s
wyd s
∗
s ∈
∼ m−1 wxd s
wxd s
∗ : 1
s ∈
− m−1 wxd s
wv s
∗ :̃ e−i
+ op 1
s ∈
s ∈ s ∈
1
= m−1 w
w
∗ + op 1
s ∈
1 − eis v s v s
2"
→p f
1 − ei vv
It follows from (95), (102), (109), and (110) that
2" 2"
:̂ →d : 1
− G −1 f
:̃ e−i
= : 1
+ G −1 f
:̃ e−i
e−i − 1
1 − ei vv 1 − ei 2 vv
The true coefﬁcient is
: = b −
= : e−i
= : 1
+ :̃ e−i
e−i − 1
so we have
2" −1
:̂ →d : + G f
− 1 :̃ e−i
e−i − 1
1 − ei 2 vv
which gives the stated result since fxx
= 1 − ei −2 fvv
.
Part (b)# The estimator :̃ is derived from the augmented spectral regression (32) and the relation
(34). In (32), yt and xt are ﬁrst detrended in the time domain and then dft’s are taken of the detrended
data and differences of the detrended data. Since w1xd s
∼ wv s
+ op 1
, (108) can be written as
(111) wyd s
∗ = wxd s
∗ : 1
− w1xd s
∗ :̃ e−is
+ w( s
∗ + op 1
in view of (99). It then follows from (98), Lemma C(k), (112), and (111) that
1 −1 1
d
n :̃0 − : 1
as required.
band spectral regression 1103
Now take the case = 0. From part (f) of Lemma C and (52) we have
wv s
eis x̃n − x̃0
D
n−1 D
D
−1 n1/2 wd s
wxz s
= wxd s
= − − n−3/2 X
1−e is 1 − eis n1/2
wv s
D
n−1 D
D
−1 n1/2 wd s
= + w nt s
x̃n − x̃0
− n−3/2 X
1 − eis
w
= v is + An n1/2 wd s
1−e s
Here, n1/2 wd s
= Op 1
from (42) and
x̃ − x̃
D
n−1 D
D
−1 = Op 1
A
n = 0 n√ 0 − n−3/2 X
n
Then (111) is
∗
wv s
(113) wyd s
∗ = + A n n 1/2
w d s
: 1
− wv s
∗ :̃ e−is
+ w( s
∗ + op 1
1 − eis
: 1
= wv s
∗ − :̃ e−is
+ wd s
∗ n1/2 An
+ w( s
∗ + op 1
1−e s−i
The augmented narrow band regression (32) around frequency can therefore be written as
wv s
(114) wyz s
= ã
1 + A n n 1/2
w d s
+ ã
2 wv s
+ op 1
+ residual
1 − eis
(115) wyz s
∗ = wv s
∗ b̃1 − + n1/2 wd s
∗ b̃2 − + residual
with
ã1 −
b̃1 − = + ã2 − b̃2 = ã1 − An
1 − e−i
In view of (113), (115), and the asymptotic orthogonality of the regressors in (115) (i.e., m−1
1/2
s ∈ wv s
n wd s
: 1
:
b̃1 − →p − :̃ e−i
=
1 − e−i 1 − e−i
and
√ : 2"f((
m b̃1 − − → d N c 0
1 − e−i 2"fvv
We deduce that
and
√
f
m :̃ − : →d Nc 0 ((
fxx
= n−2 X
QV A QV X
−1 n−1 X
QV A QV (
QV A QV X
= n−2 X −1 n−1 X
QV A QV (
QA Z A QA Z X
= n−2 X −1 n−1 X
QA Z A QA Z (
Next,
X
A − X
QA Z A = X
PA Z A = X
A − X
A Z Z
A Z
−1 Z
A
A − X
=X
A D D
A D
−1 D
A
and so
X = X
QA Z A Q A Z X
QA Z A
A QA Z X
=X
A X
− X
A D D
A D
−1 D
A X
which is
wx̃ s
wx̃ s
∗
s ∈A
−1
− wx̃ s
wd s
∗ wd s
wd s
∗ wd s
wx̃ s
∗
s ∈A s ∈A s ∈A
d
1
n−2 wx̃ s
wx̃ s
∗ → Bx Bx
s ∈A 0
1
d
n−3/2 wx̃ s
wd s
∗ →d Bx u
s ∈A 0
1
n−1 wd s
wd s
∗ → uu
s ∈A 0
Thus,
1
1
1
−1 1
1
d
(116)
QA Z A Q A Z X
n−2 X → Bx Bx
− Bx u
uu
f0 Bx
= Bxu Bxu
0 0 0 0 0
QA Z A QA Z ( = n−1 X
n−1 X
A ( − X
A D D
A D
−1 D
A (
= n−1 wx̃ s
w( s
∗ − n−3/2 wx̃ s
wd s
∗
s ∈A s ∈A
−1
× n−1 wd s
wd s
∗ n−1/2 wd s
w( s
∗
s ∈A s ∈A
d
1
n−1 wx̃ s
w( s
∗ → Bx dB(
s ∈A 0
band spectral regression 1105
and
d
1
n−1/2 wd s
w( s
∗ → u dB(
s ∈A 0
Thus,
1
1
1
−1 1 1
d
QA Z A Q A Z ( →
n−1 X Bx dB( − Bx u
uu
udB( = Bxu dB(
0 0 0 0 0
It follows that
1
−1 1
1
−1
f d
n :̂A − :A
→ Bxu Bxu Bxu dB( ≡ MN 0 Bxu Bxu 2"f(( 0
0 0 0
QA c Z A c QA c Z X
= n−1 X −1 n−1/2 X
QA c Z A c QA c Z (
As above,
QA c Z A c QA c Z X
X = X
QA c Z A c
A c QA c Z X
=X
A c X
− X
A c D D
A c D
− D
A c X
∗
∗
= wx̃ s
wx̃ s
− wx̃ s
wd s
s ∈c s ∈c
A A
−1
× wd s
wd s
∗ wd s
wx̃ s
∗
s ∈c s ∈c
A A
From the above expression and Lemma C(d), (e), and (h) we deduce that
(118)
QA c Z A c QA c Z X
n−1 X
ei f
∗
d 1 1 1 1
→ fxx
+ Bx 1
Bx 1
d − Bx 1
d
c
A
2" 1 − e
i 2 2" c
A
1−e i
− −i
1 1 e
× f
f1
∗ d f
dBx 1
= fxx
+ B x 1
B x 1
d − B x 1
B x 1
d
c
A
2" 1 − ei 2 2" c
A
1 − ei
− −i
e
× f1
f1
∗ d f1
d
c
A
c
A
1 − e−i
Next, observe that
−
ei f1
∗ ∗
d f 1
f 1
d f1
c
A
1 − ei c
A
is the L2 cA
projection of the function ei 1 − ei
−1 onto the space spanned by f1
. When
the deterministic variable zt includes a linear time trend, we know from (39) that the vector f1
×n−1/2 f1 s
w( s
∗
s ∈c
A
ei f
∗
d 1 1
∼ n−1/2 wx̃ s
− Bx 1
d
s ∈c
2" c
A
1 − ei
A
−
1
× f1
f1
∗ d f1 s
w( s
∗
2" cA
eis
= n−1/2 wx̃ s
− Bx 1
w( s
∗
∈c
1−e si
s A
1 eis x̃n − x̃0
eis
= n−1/2 w
− − Bx 1
s ∈c
1 − eis J s 1 − eis n1/2 1 − eis
A
× w( s
∗
1
= n−1/2 w J s
w( s
∗ + op 1
s ∈c
1 − eis
A
d 2" 1
∼ N 0 wJ s
wJ s
∗ f(( s
n ∈c 1 − e
is 2
s A
d
∼ N 0 2" fxx
f((
d
c
A
We deduce that
−1 −1
√ d
f
n :̂Ac − :Ac
→ N 0 fxx
d 2" fxx
f((
d fxx
d
c c c
A A A
Proof of Theorem 3
: Part (a)# First note that
wx s
= %2
wz s
+ wx̃ s
= %2
5n wd s
+ wx̃ s
where
−1
f
wxd s
∗ = wx s
∗ − wd s
∗ wd s
wd s
∗ wd s
wx s
∗
s ∈ s ∈
−1
= wx̃ s
∗ − wd s
∗ wd s
wd s
∗ wd s
wx̃ s
∗
s ∈ s ∈
f ∗
= w s
x̃d say
f f
with a similar expression for wyd s
= wỹd s
, and
−1
f
w1x̃d s
∗ = w1x̃ s
∗ − wd s
∗ wd s
wd s
∗ wd s
w1x̃ s
∗
s ∈ s ∈
∗
= wv s
+ op 1
d
1
f f
n−2 wx̃d s
wx̃d s
∗ →
Bxu Bxu
s ∈0 0
d
1
f
n−1 wx̃d s
w( s
∗ → Bxu dB(
s ∈0 0
Next consider the = 0 case. First we simplify the regression equation (120):
f
f
f
(121) wỹd s
= c̃1 wx̃d s
+ c̃2 w1x̃d s
+ residual
f
= c̃1 wx̃d s
+ c̃2 wv s
+ op 1
+ residual
∗ −is
wv s
e x̃n − x̃0
= −
1 − e−is 1 − e−is n1/2
−
1 m m e−i
− √ f1
∗ f1
f1
∗ √ f1
B 1
n n n 1 − e−i
1108 d. corbae, s. ouliaris, and p. c. b. phillips
wv s
∗ e−is x̃n − x̃0
e−i
= − − B 1
(123) wỹd s
∗ = + o p 1
c̃1 + wv s
+ op 1
∗ c̃2 + residual
1 − eis
f c̃1 − : 1
:
b̃1 − #= + c̃2 −p →p − :̃ e−i
=
1 − e−i 1 − e−i 1 − e−i
and
√ : f((
m b̃1 − − → d N c 0
1 − e−i fvv
It follows that
and
√
f
m :̃f − : →d Nc 0 ((
fxx
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band spectral regression 1109