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Spurious rejection by cointegration tests incorporating structural change in the cointegrating relationship

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  • Steven Cook
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    Abstract

    In recent research, Leybourne and Newbold have shown commonly employed tests of cointegration to exhibit spurious rejection when applied to independent unit root processes subject to breaks in either level or trend. In the present paper, this research is extended to consider the finite-sample properties of cointegration tests which explicitly incorporate structural change. It is shown that when applied to independent unit root processes subject to regime shifts, cointegration tests permitting structural change in the cointegrating relationship can spuriously reject the null of no cointegration more frequently than the standard tests considered by Leybourne and Newbold.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

    Volume (Year): 11 (2004)
    Issue (Month): 14 ()
    Pages: 879-884

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    Handle: RePEc:taf:apeclt:v:11:y:2004:i:14:p:879-884

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    1. Leybourne, Stephen J. & C. Mills, Terence & Newbold, Paul, 1998. "Spurious rejections by Dickey-Fuller tests in the presence of a break under the null," Journal of Econometrics, Elsevier, vol. 87(1), pages 191-203, August.
    2. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    3. Gregory, Allan W. & Nason, James M. & Watt, David G., 1996. "Testing for structural breaks in cointegrated relationships," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 321-341.
    4. Allan W. Gregory & James M. Nason, 1991. "Testing for Structural Breaks," Working Papers 827, Queen's University, Department of Economics.
    5. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    6. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    7. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
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    Cited by:
    1. Dubecq, S. & Ghattassi, I., 2009. "Consumption-Wealth Ratio and Housing Prices," Working papers 264, Banque de France.
    2. Ayla Ogus & Niloufer Sohrabji, 2008. "Intertemporal solvency of Turkey’s current account," Working Papers 0805, Izmir University of Economics.
    3. Mário Jorge Mendonça & Cláudio H. dos Santos, 2008. "Revisitando a Função de Reação Fiscal no Brasil Pós-Real: Uma Abordagem de Mudanças de Regime," Discussion Papers 1337, Instituto de Pesquisa Econômica Aplicada - IPEA.

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