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Low-frequency robust cointegration testing

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  • Müller, Ulrich K.
  • Watson, Mark W.

Abstract

Standard inference in cointegrating models is fragile because it relies on an assumption of an I(1) model for the common stochastic trends, which may not accurately describe the data’s persistence. This paper considers low-frequency tests about cointegrating vectors under a range of restrictions on the common stochastic trends. We quantify how much power can potentially be gained by exploiting correct restrictions, as well as the magnitude of size distortions if such restrictions are imposed erroneously. A simple test motivated by the analysis in Wright (2000) is developed and shown to be approximately optimal for inference about a single cointegrating vector in the unrestricted stochastic trend model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 174 (2013)
Issue (Month): 2 ()
Pages: 66-81

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Handle: RePEc:eee:econom:v:174:y:2013:i:2:p:66-81

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

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Keywords: Stochastic trends; Persistence; Size distortion; Interest rates; Term spread;

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Cited by:
  1. Moreira, Humberto & Moreira, Marcelo J., 2013. "Contributions to the Theory of Optimal Tests," Economics Working Papers (Ensaios Economicos da EPGE) 747, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  2. Castelnuovo, Efrem, 2010. "Tracking U.S. inflation expectations with domestic and global indicators," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1340-1356, November.

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