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The effect of structural breaks on the Engle-Granger test for cointegration

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Author Info

  • Antonio E. Noriega

    (Banco de México and Universidad de Guanajuato)

  • Daniel Ventosa-Santaularia

    (Universidad de Guanajuato)

Abstract

This paper extends Gonzalo and Lee's (1998) results by studying the asymptotic and finite sample behavior of the Engle-Granger test for cointegration, under misspecification of the trend function in the form of neglected structural breaks. We allow breaks in level and slope of trend in both dependent and explanatory variables. We also allow these processes to interact with I (1) processes without breaks. In some cases, breaks bias the EG test towards both rejecting a true cointegration relation, and not rejecting a non-existent one. Using real data, we present an empirical illustration of the theoretical results.

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Bibliographic Info

Article provided by El Colegio de México, Centro de Estudios Económicos in its journal Estudios Económicos.

Volume (Year): 27 (2012)
Issue (Month): 1 ()
Pages: 99-132

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Handle: RePEc:emx:esteco:v:27:y:2012:i:1:p:99-132

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Web page: http://www.colmex.mx/centros/cee/
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Related research

Keywords: cointegration; structural breaks; integrated processes; Engle-Granger test;

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References

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  1. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, vol. 82(1), pages 107-134.
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Cited by:
  1. Daniel Ventosa-santaulària & Manuel Gómez-zaldívar & Lizet A Pérez, 2013. "Long-run relationship with shifts between Mexican current account revenues and expenditures," Economics Bulletin, AccessEcon, vol. 33(2), pages 1317-1327.

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