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Cointegration tests under multiple regime shifts: An application to the stock price–dividend relationship

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  • Vasco Gabriel
  • Luis Martins

    ()

Abstract

We examine the properties of several residual-based cointegration tests when long run parameters are subject to multiple shifts driven by an unobservable Markov process. Unlike earlier work, which considered one-off deterministic breaks, our approach has the advantage of allowing for an unspeci?ed number of stochastic breaks. We illustrate this issue by exploring the possibility of Markov switching cointegration in the stock-price dividend relationship and showing that this case is empirically relevant. Our subsequent Monte Carlo analysis reveals that standard cointegration tests are generally reliable, their performance often being robust for a number of plausible regime shift parameterizations.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 41 (2011)
Issue (Month): 3 (December)
Pages: 639-662

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Handle: RePEc:spr:empeco:v:41:y:2011:i:3:p:639-662

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Related research

Keywords: Present value model; Cointegration tests; Markov switching; C32; G12; E44;

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Cited by:
  1. Mehmet Balcilar & Charl Jooste & Shawkat Hammoudeh & Rangan Gupta & Lardo Vassilios Babalos, 2014. "Are there Long-Run Diversification Gains from the Dow Jones Islamic Finance Index?," Working Papers 201433, University of Pretoria, Department of Economics.
  2. Maki, Daiki, 2012. "Tests for cointegration allowing for an unknown number of breaks," Economic Modelling, Elsevier, vol. 29(5), pages 2011-2015.

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