Measuring correlations of integrated but not cointegrated variables: A semiparametric approach

Many macroeconomic and financial variables are integrated of order one (or I ( 1 ) ) processes and are correlated with each other but not necessarily cointegrated. In this paper, we propose to use a semiparametric varying coefficient approach to model/capture such correlations. We propose two consistent estimators to study the dependence relationship among some integrated but not cointegrated time series variables. Simulations are used to examine the finite sample performances of the proposed estimators.