Test for the null hypothesis of cointegration with reduced size distortion
AbstractThis article considers a single-equation cointegrating model and proposes the locally best invariant and unbiased (LBIU) test for the null hypothesis of cointegration. We derive the local asymptotic power functions and compare them with the standard residual-based test, and show that the LBIU test is more powerful in a wide range of local alternatives. Then, we conduct a Monte Carlo simulation to investigate the finite sample properties of the tests and show that the LBIU test outperforms the residual-based test in terms of both size and power. The advantage of the LBIU test is particularly patent when the error is highly autocorrelated. Furthermore, we point out that finite sample performance of existing tests is largely affected by the initial value condition while our tests are immune to it. We propose a simple transformation of data that resolves the problem in the existing tests. Copyright 2008 The Authors
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Time Series Analysis.
Volume (Year): 29 (2008)
Issue (Month): 3 (05)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0143-9782
Other versions of this item:
- Eiji Kurozumi & Yoichi Arai, 2006. "Test for the null hypothesis of cointegration with reduced size distortion," Hi-Stat Discussion Paper Series d06-190, Institute of Economic Research, Hitotsubashi University.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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- Hadri, Kaddour & Kurozumi, Eiji & Rao, Yao, 2013. "Novel Panel Cointegration Tests Emending for Cross-Section Dependence with N Fixed," Discussion Papers 2013-12, Graduate School of Economics, Hitotsubashi University.
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