The Application of the Factor Model

Abstract

Gonzalo’s and Granger’s decomposition of a cointegrated vector X_t into a permanent component ${A_1}\alpha _ \bot ^/{X_t}$ and transitory component $({A_2}{\beta ^/}{X_t})$ is as follows:

$$ {X_t} = {A_1}\alpha _ \bot ^/{X_t} + {A_2}{\beta ^/}{X_t} $$

(1)