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Spurious Cointegration: The Engle-Granger Test in the Presence of Structural Breaks

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Author Info
Antonio E. Noriega
Daniel Ventosa-Santaulària
Abstract

This paper analyses the asymptotic behavior of the Engle-Granger t-test for cointegration when the data include structural breaks, instead of being pure I(1) processes. We find that the test does not possess a limiting distribution, but diverges as the sample size tends to infinity. Calculations involving the asymptotic expression of the t-test , as well as Monte Carlo simulations, reveal that the test can diverge in either direction, making it unreliable as a test for cointegration, when there are neglected breaks in the trend function of the data. Using real data on car sales and murders in the US, we present an empirical illustration of the theoretical results.

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File URL: http://www.banxico.org.mx/documents/%7B168AEF3C-CAD7-0582-0EEC-E05959674094%7D.pdf
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Paper provided by Banco de México in its series Working Papers with number 2006-12.

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Date of creation: Dec 2006
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Handle: RePEc:bdm:wpaper:2006-12

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Web page: http://www.banxico.org.mx
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Related research
Keywords: Spurious cointegration structural breaks integrated processes

Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models

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