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Local Power Of Likelihood Ratio Tests For The Cointegrating Rank Of A Var Process

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  • Saikkonen, Pentti
  • L tkepohl, Helmut

Abstract

Likelihood ratio (LR) tests for the cointegrating rank of a vector autoregressive process have been developed under different assumptions regarding deterministic terms. For instance, nonzero mean terms and linear trends have been accounted for in some of the tests. In this paper we provide a general framework for deriving the local power properties of these tests. Thereby it is possible to assess the virtue of utilizing varying amounts of prior information by making assumptions regarding the deterministic terms. One interesting result from this analysis is that if no assumptions regarding the specific form of the mean term are made whereas a linear trend is excluded then a test is available that has the same local power as an LR test derived under a zero mean assumption.

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Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 15 (1999)
Issue (Month): 01 (February)
Pages: 50-78

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Handle: RePEc:cup:etheor:v:15:y:1999:i:01:p:50-78_15

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  1. Paruolo, Paolo, 1997. "Asymptotic Inference on the Moving Average Impact Matrix in Cointegrated 1(1) VAR Systems," Econometric Theory, Cambridge University Press, vol. 13(01), pages 79-118, February.
  2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  3. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  4. Horvath, Michael T.K. & Watson, Mark W., 1995. "Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified," Econometric Theory, Cambridge University Press, vol. 11(05), pages 984-1014, October.
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