Spurious Cointegration: The Engle-Granger Test in the Presence of Structural Breaks
AbstractThis 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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Bibliographic InfoPaper provided by Banco de México in its series Working Papers with number 2006-12.
Date of creation: Dec 2006
Date of revision:
Spurious cointegration; structural breaks; integrated processes;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-30 (All new papers)
- NEP-ECM-2007-06-30 (Econometrics)
- NEP-ETS-2007-06-30 (Econometric Time Series)
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