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Comparison of tests for the cointegrating rank of a VAR process with a structural shift

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  • Lutkepohl, Helmut
  • Saikkonen, Pentti
  • Trenkler, Carsten

Abstract

Two different types of tests for the cointegrating rank of VAR processes with a deterministic shift in the level have been proposed in the literature. The first proposal is based on the LR principle using a specific Gaussian model set-up. In the second proposal the time series are adjusted for deterministic terms first and then LR type tests are applied to the adjusted series. The local power of the two types of tests is derived and compared. Moreover, the small sample size and power properties of the tests are explored. It is found that the tests based on adjusted series generally have superior local power and size properties.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 113 (2003)
Issue (Month): 2 (April)
Pages: 201-229

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Handle: RePEc:eee:econom:v:113:y:2003:i:2:p:201-229

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Web page: http://www.elsevier.com/locate/jeconom

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References

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  1. Bent Nielsen & Soren Johansen and Rocco Mosconi, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Economics Series Working Papers 2000-W22, University of Oxford, Department of Economics.
  2. Campos, Julia & Ericsson, Neil R. & Hendry, David F., 1996. "Cointegration tests in the presence of structural breaks," Journal of Econometrics, Elsevier, vol. 70(1), pages 187-220, January.
  3. Saikkonen, Pentti & Lutkepohl, Helmut, 2000. "Testing for the Cointegrating Rank of a VAR Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 451-64, October.
  4. Inoue, Atsushi, 1999. "Tests of cointegrating rank with a trend-break," Journal of Econometrics, Elsevier, vol. 90(2), pages 215-237, June.
  5. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  6. Seo, Byeongseon, 1998. "Tests For Structural Change In Cointegrated Systems," Econometric Theory, Cambridge University Press, vol. 14(02), pages 222-259, April.
  7. Saikkonen, Pentti & Lütkepohl, Helmut, 1997. "Local power of likelihood ratio tests for the cointegrating rank of a VAR process," SFB 373 Discussion Papers 1997,58, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  8. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
  9. Toda, Hiro Y, 1994. "Finite Sample Properties of Likelihood Ratio Tests for Cointegrating Ranks when Linear Trends are Present," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 66-79, February.
  10. Toda, Hiro Y., 1995. "Finite Sample Performance of Likelihood Ratio Tests for Cointegrating Ranks in Vector Autoregressions," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1015-1032, October.
  11. H. Lütkepohl & P. Saikkonen, 1997. "Testing for the Cointegrating Rank of a VAR Process with a Time Trend," SFB 373 Discussion Papers 1997,79, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  12. Quintos, Carmela E., 1998. "Stability tests in error correction models," Journal of Econometrics, Elsevier, vol. 82(2), pages 289-315, February.
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