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On the Validity of Tests for Asymmetry in Residual-Based Threshold Cointegration Models

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  • Karl-Heinz Schild

    (Department of Statistics, Philipps-University of Marburg, Universitätsstraße 25, 35037 Marburg, Germany)

  • Karsten Schweikert

    (Core Facility Hohenheim, University of Hohenheim, Schloss Hohenheim 1 C, 70593 Stuttgart, Germany)

Abstract

This paper investigates the properties of tests for asymmetric long-run adjustment which are often applied in empirical studies on asymmetric price transmissions. We show that substantial size distortions are caused by preconditioning the test on finding sufficient evidence for cointegration in a first step. The extent of oversizing the test for long-run asymmetry depends inversely on the power of the primary cointegration test. Hence, tests for long-run asymmetry become invalid in cases of small sample sizes or slow speed of adjustment. Further, we provide simulation evidence that tests for long-run asymmetry are generally oversized if the threshold parameter is estimated by conditional least squares and show that bootstrap techniques can be used to obtain the correct size.

Suggested Citation

  • Karl-Heinz Schild & Karsten Schweikert, 2019. "On the Validity of Tests for Asymmetry in Residual-Based Threshold Cointegration Models," Econometrics, MDPI, vol. 7(1), pages 1-13, March.
    • Handle: RePEc:gam:jecnmx:v:7:y:2019:i:1:p:12-:d:213519
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