Common factors in conditional distributions for Bivariate time series
Clive W.J Granger
A definition for a common factor for bivariate time series is suggested by considering the decomposition of the conditional density into the product of the marginals and the copula, with the conditioning variable being a common factor if it does not directly enter the copula. The links of this definition with a common factor being a dominant feature in standard linear representations is shown. An application using a business cycle indicator as the common factor in the relationship between U.S. income and consumption found that both series held the factor in their marginals but not in the copula.
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