The Likelihood Ratio Test For Cointegration Ranks In The I(2) Model
AbstractThis paper presents the likelihood ratio (LR) test for the number of cointegrating relations in the I(2) vector autoregressive model. It is shown that the asymptotic distribution of the LR test for the cointegration ranks is identical to the asymptotic distribution of the much applied test statistic based on the two-step estimation procedure in Johansen (1995, Econometric Theory 11, 25 59), Paruolo (1996, Journal of Econometrics 72, 313 356), and Rahbek, Kongsted, and J rgensen (1999, Journal of Econometrics 90, 265 289). By construction the LR test statistic is smaller than the non-LR test statistic from the two-step procedure, and application of the LR test may change rank selection in empirical work. Based on a study of existing empirical applications and related Monte Carlo simulations we conclude that the LR test has much better size properties when compared to the two-step-based test. Overall, we propose use of the LR test for rank determination in I(2) analysis.Discussions with S ren Johansen, Hans Christian Kongsted, and Bent Nielsen are gratefully acknowledged. We also thank the editor and three anonymous referees for very constructive comments that have led to a much improved version of the paper. This research was supported by Danish Social Sciences Research Council grant 2114-04-0001.
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Bibliographic InfoArticle provided by Cambridge University Press in its journal Econometric Theory.
Volume (Year): 23 (2007)
Issue (Month): 04 (August)
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- Søren Johansen & Katarina Juselius & Roman Frydberg & Michael Goldberg, 2008.
"Testing hypotheses in an I(2) model with applications to the persistent long swings in the Dmk/$ rate,"
CREATES Research Papers
2008-03, School of Economics and Management, University of Aarhus.
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- Takamitsu Kurita, 2009. "A note on testing parameter constancy in cointegrated vector autoregression: the case of near I(2) processes," Economics Bulletin, AccessEcon, vol. 29(2), pages 575-587.
- Heino Bohn Nielsen & Christopher Bowdler, 2003.
"Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices,"
2003-W05, Economics Group, Nuffield College, University of Oxford.
- Heino Nielsen & Christopher Bowdler, 2006. "Inflation adjustment in the open economy: an I(2) analysis of UK prices," Empirical Economics, Springer, vol. 31(3), pages 569-586, September.
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