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Bootstrap and fast double bootstrap tests of cointegration rank with financial time series

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Author Info
Ahlgren, N.
Antell, J.

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Abstract

The likelihood ratio test of cointegration rank is the most widely used test for cointegration. Many studies have shown that its finite sample distribution is not well approximated by the limiting distribution. Bootstrap and fast double bootstrap (FDB) algorithms for the likelihood ratio test are introduced and evaluated by Monte Carlo simulation experiments. It is found that the performance of the ordinary (single) bootstrap test is in most cases good in terms of the size of the test. The FDB produces a further improvement in cases where the performance of the asymptotic test is unsatisfactory and the single bootstrap test overrejects noticeably. The FDBÂ is shown to be a useful supplement to the single bootstrap as a tool for determining the cointegration rank. The tests are applied to US interest rates and international stock prices series. By simulating the data assuming that the cointegration rank is known, it is found that the asymptotic test tends to overestimate the cointegration rank, while the bootstrap and FDB tests choose the correct cointegration rank.

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Publisher Info
Article provided by Elsevier in its journal Computational Statistics & Data Analysis.

Volume (Year): 52 (2008)
Issue (Month): 10 (June)
Pages: 4754-4767
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Handle: RePEc:eee:csdana:v:52:y:2008:i:10:p:4754-4767

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Doornik, Jurgen A & Hendry, David F & Nielsen, Bent, 1998. " Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Blackwell Publishing, vol. 12(5), pages 533-72, December. [Downloadable!] (restricted)
  2. Harris, R. I. D. & Judge, G., 1998. "Small sample testing for cointegration using the bootstrap approach," Economics Letters, Elsevier, vol. 58(1), pages 31-37, January. [Downloadable!] (restricted)
  3. Paparoditis, Efstathios & Politis, Dimitris N., 2005. "Bootstrapping Unit Root Tests for Autoregressive Time Series," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 545-553, June. [Downloadable!] (restricted)
  4. Russell Davidson & James G. MacKinnon, 2006. "Improving the Reliability of Bootstrap Tests with the Fast Double Bootstrap," Working Papers 1044, Queen's University, Department of Economics. [Downloadable!]
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  5. Ahlgren, Niklas & Antell, Jan, 2002. "Testing for Cointegration between International Stock Prices," Applied Financial Economics, Taylor and Francis Journals, vol. 12(12), pages 851-61, December. [Downloadable!] (restricted)
  6. Ruiz, Esther & Pascual, Lorenzo, 2002. " Bootstrapping Financial Time Series," Journal of Economic Surveys, Blackwell Publishing, vol. 16(3), pages 271-300, July. [Downloadable!] (restricted)
  7. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February. [Downloadable!] (restricted)
  8. van Giersbergen, Noud P A, 1996. "Bootstrapping the Trace Statistic in VAR Models: Monte Carlo Results and Applications," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(2), pages 391-408, May.
  9. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February. [Downloadable!] (restricted)
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  1. Kulp-Tåg, Sofie, 2007. "An Empirical Comparison of Linear and Nonlinear Volatility Models for Nordic Stock Returns," Working Papers 525, Hanken School of Economics. [Downloadable!]
  2. Strandvik, Tore & Holmlund, Maria & Edvardsson, Bo, 2008. "Customer Needing - Conceptualising Industrial Service from a Customer Perspective," Working Papers 536, Hanken School of Economics. [Downloadable!]
  3. Ahlgren, Niklas & Antell, Jan, 2009. "The Power of Bootstrap Tests of Cointegration Rank with Financial Time Series," Working Papers 541, Hanken School of Economics. [Downloadable!]
  4. Ahlgren, Niklas & Juselius, Mikael, 2009. "Tests for Cointegration Rank and the Initial Condition," Working Papers 539, Hanken School of Economics. [Downloadable!]
  5. Wägar, Karolina & Björk, Peter & Ravald, Annika & West, Björn, 2007. "Exploring Marketing in Micro Firms," Working Papers 531, Hanken School of Economics. [Downloadable!]
  6. Ekholm, Bo-Göran & Wallin, Jan, 2006. "Flexible Budgeting under Uncertainty: A Real Options Perspective," Working Papers 520, Hanken School of Economics. [Downloadable!]
  7. Segercrantz, Beata, 2007. "Constructing Stability in Software Product Development during Organizational Restructurings," Working Papers 527, Hanken School of Economics. [Downloadable!]
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