A Recursive Monte Carlo Study of Structural-Break Sensitivity of Adjustment Coefficients in Cointegrated VAR Systems

This paper studies the sensitivity of adjustment coefficients to various structural breaks in a cointegrated vector autoregressive system. A Monte Carlo simulation study is conducted in a recursive manner to examine fluctuations of finite-sample estimates of the coefficients. The study reveals the wide-ranging influences of breaks on the estimates, which can give rise to inference for spurious time-varying adjustment coefficients, although the underlying true coefficients are stable and time-invariant. It is thus advisable to be cautious about seemingly time-varying adjustment coefficients when analyzing time series data subject to structural breaks.