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Testing the null of cointegration with a structural break: optimal kernel and bandwidth selection

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  • Alexander Ludwig

    ()
    (TU Dresden)

Abstract

Structural breaks in relationships between macroeconomic and financial time series are likely a result of financial crises or local reforms. If such structural breaks exist, cointegration tests have to take them into account. Arai and Kurozumi (2007), Carrion-i-Silvestre and Sanso (2006) and Kejriwal (2008) propose a test for the null of cointegration with structural breaks against the alternative of no cointegration (ACK test). In this paper, we systematically examine the ACK test along several dimensions: sample size, kernel selection, bandwidth selection, the maximum value of the first order autocorrelation coefficient allowed in the automated bandwidth estimators proposed by Andrews (1991) and break height. We then compare statistical error frequencies to those of the test proposed by Gregory and Hansen (1996) for the null of no cointegration against the alternative of cointegration with a structural break. We find that the ACK test performs better than the Gregory and Hansen (1996) test in some cases, especially when the data generating process does not contain a cointegration vector. If there is a cointegration vector, the ACK test usually leads to larger statistical error frequencies. The ACK test should hence be used in combination with other tests for cointegration.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 33 (2013)
Issue (Month): 4 ()
Pages: 2828-2839

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Handle: RePEc:ebl:ecbull:eb-13-00135

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Keywords: cointegration; structural breaks; kernel selection; bandwidth selection; statistical error frequencies;

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References

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  1. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
  2. Kurozumi, Eiji, 2002. "Testing for stationarity with a break," Journal of Econometrics, Elsevier, Elsevier, vol. 108(1), pages 63-99, May.
  3. Kejriwal, Mohitosh & Perron, Pierre, 2008. "The limit distribution of the estimates in cointegrated regression models with multiple structural changes," Journal of Econometrics, Elsevier, Elsevier, vol. 146(1), pages 59-73, September.
  4. Mohitosh Kejriwal & Pierre Perron, 2006. "Testing for Multiple Structural Changes in Cointegrated Regression Models," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2006-051, Boston University - Department of Economics.
  5. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 817-58, May.
  6. Schwert, G William, 1989. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 7(2), pages 147-59, April.
  7. Ted Juhl & Zhijie Xiao, 2009. "Tests for Changing Mean with Monotonic Power," Boston College Working Papers in Economics, Boston College Department of Economics 709, Boston College Department of Economics.
  8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  9. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
  10. Josep Lluís Carrion-i-Silvestre & Andreu Sansó, 2006. "Testing the Null of Cointegration with Structural Breaks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 68(5), pages 623-646, October.
  11. Kejriwal Mohitosh, 2008. "Cointegration with Structural Breaks: An Application to the Feldstein-Horioka Puzzle," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 12(1), pages 1-39, March.
  12. Yoichi Arai & Eiji Kurozumi, 2007. "Testing for the Null Hypothesis of Cointegration with a Structural Break," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(6), pages 705-739.
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