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The Power of Lambda Max

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  • Paruolo, Paolo

Abstract

This paper considers likelihood ratio (LR) cointegration rank tests in vector autoregressive models (VAR); the local power of the most widely used LR "trace" test is compared with the LR "lamda max" test. It is found that neither test uniformly dominates the other one. Moreover it is shown that the asymptotic properties of the estimator of the cointegration rank based on the trace test are shared by a similar estimator based on the lambda max test. These results indicate that both tests are admissible. Copyright 2001 by Blackwell Publishing Ltd

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 63 (2001)
Issue (Month): 3 (July)
Pages: 395-403

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Handle: RePEc:bla:obuest:v:63:y:2001:i:3:p:395-403

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Cited by:
  1. Paruolo, Paolo, 2006. "Common trends and cycles in I(2) VAR systems," Journal of Econometrics, Elsevier, Elsevier, vol. 132(1), pages 143-168, May.
  2. Carsten Trenkler, 2006. "Bootstrapping Systems Cointegration Tests with a Prior Adjustment for Deterministic Terms," SFB 649 Discussion Papers SFB649DP2006-012, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Majocchi Antonio & Pavione Enrica, 2002. "International franchising in Italy: trends and perspectives," Economics and Quantitative Methods, Department of Economics, University of Insubria qf0215, Department of Economics, University of Insubria.
  4. Nielsen, Heino Bohn, 2007. "A "maximum-eigenvalue" test for the cointegration ranks in I(2) vector autoregressions," Economics Letters, Elsevier, Elsevier, vol. 94(3), pages 445-451, March.
  5. Giuseppe Cavaliere & Luca Fanelli & Paolo Paruolo, 2009. "Tests for cointegration rank and choice of the alternative," Statistical Methods and Applications, Springer, Springer, vol. 18(2), pages 169-191, July.
  6. Giuseppe Cavaliere & Anders Rahbek & A. M. Robert Taylor, 2010. "Bootstrap Sequential Determination of the Co-integration Rank in VAR Models," Discussion Papers 10-07, University of Copenhagen. Department of Economics.
  7. Paolo Paruolo, 2006. "The Likelihood Ratio Test for the Rank of a Cointegration Submatrix," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 68(s1), pages 921-948, December.
  8. Cavaliere Giuseppe & Fanelli Luca & Paruolo Paolo, 2001. "Determining the number of cointegrating relations under rank constraints," Economics and Quantitative Methods, Department of Economics, University of Insubria qf0109, Department of Economics, University of Insubria.

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