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Spurious Regression, Cointegration, and Near Cointegration: A Unifying Approach

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  • Jansson, Michael
  • Haldrup, Niels Prof.

Abstract

This paper introduces a representation of an integrated vector time series in which the coefficient of multiple correlation computed from the long-run covariance matrix of the innovation sequences is a primitive parameter of the model. Based on this representation, we propose a notion of near cointegration, which helps bridging the gap between the polar cases of spurious regression and cointegration. Two applications of the model of near cointegration are provided. As a first application, the properties of conventional cointegration methods under near cointegration are characterized, hereby investigating the robustness of cointegration methods. Secondly, we illustrate how to obtain local power functions of cointegration tests that take cointegration as the null hypothesis.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt5b13w0rp.

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Date of creation: 01 Jun 2000
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Handle: RePEc:cdl:ucsdec:qt5b13w0rp

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Related research

Keywords: cointegration; spurious regression; near cointegration; cointegration tests; local power function; Brownian motion;

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  1. Peter C.B. Phillips, 1986. "Regression Theory for Near-Integrated Time Series," Cowles Foundation Discussion Papers 781R, Cowles Foundation for Research in Economics, Yale University, revised Jan 1987.
  2. Peter C.B. Phillips, 1987. "Weak Convergence of Sample Covariance Matrices to Stochastic Integrals via Martingale Approximations," Cowles Foundation Discussion Papers 846, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Angela Huang, 2004. "Examining finite-sample problems in the application of cointegration tests for long-run bilateral exchange rates," Reserve Bank of New Zealand Discussion Paper Series DP 2004/08, Reserve Bank of New Zealand.

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