Testing for cointegration rank using Bayes factors

This paper proposes Bayesian methods for estimating the cointegration rank using Bayes factors. We consider natural conjugate priors for computing Bayes factors. First, we estimate the cointegrating vectors for each possible rank. Then, we compute the Bayes factors for each rank against 0 rank. Monte Carlo simulations show that using Bayes factor with conjugate priors produces fairly good results. We apply the method to demand for money in the US