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Residuals-based tests for the null of no-cointegration: an Analytical comparison

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  • Elena Pesavento

Abstract

This article studies the asymptotic distribution of five residuals-based tests for the null of no-cointegration under a local alternative when the tests are computed using both ordinary least squares (OLS) and generalized least squares (GLS)-detrended variables. The local asymptotic power of the tests is shown to be a function of Brownian motion and Ornstein-Uhlenbeck processes, depending on a single nuisance parameter, which is determined by the correlation at frequency zero of the errors of the cointegration regression with the shocks to the right-hand side variables. The tests are compared in terms of power in large and small samples. It is shown that, while no significant improvement can be achieved by using unit root tests other than the OLS detrended t-test originally proposed by Engle and Granger (1987), the power of GLS residuals tests can be higher than the power of system tests for some values of the nuisance parameter. Copyright 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Journal of Time Series Analysis.

Volume (Year): 28 (2007)
Issue (Month): 1 (01)
Pages: 111-137

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Handle: RePEc:bla:jtsera:v:28:y:2007:i:1:p:111-137

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Cited by:
  1. Pesavento, Elena, 2000. "Analytical Evaluation of the Power of Tests for the Absence of Cointegration," University of California at San Diego, Economics Working Paper Series qt4cq4773c, Department of Economics, UC San Diego.
  2. Wallace, Frederick, 2009. "Cointegration tests of purchasing power parity," MPRA Paper 18079, University Library of Munich, Germany.
  3. Tsen, Wong Hock, 2011. "The real exchange rate determination: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 800-811, October.

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