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End-of-Sample Cointegration Breakdown Tests

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Abstract

This paper introduces tests for cointegration breakdown that may occur over a relatively short time period, such as at the end of the sample. The breakdown may be due to a shift in the cointegrating vector or due to a shift in the errors from being I(0) to being I(1). Tests are introduced based on the post-breakdown sum of squared residuals and the post-breakdown sum of squared reverse partial sums of residuals. Critical values are provided using a parametric subsampling method. The regressors in the model are taken to be arbitrary linear combinations of deterministic, stationary, and integrated random variables. The tests are asymptotically valid when the number of observations in the breakdown period, m, is fixed and finite as the total sample size, T+m, goes to infinity. The tests are asymptotically valid under weak conditions. Simulation results indicate that the tests work well in the scenarios considered. Use of the tests is illustrated by testing for interest rate parity breakdown during the Asian financial crisis of 1997.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1404.

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Length: 55 pages
Date of creation: Mar 2003
Date of revision:
Publication status: Published in Journal of Business and Economic Statistics (2006), 24: 379-394
Handle: RePEc:cwl:cwldpp:1404

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Keywords: Cointegration; Least squares estimator; Model breakdown; Parameter change test; Structural change;

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Cited by:
  1. Carstensen, Kai & Gern, Klaus-Jürgen & Kamps, Christophe & Scheide, Joachim, 2003. "Euroland: Stagnation wird allmählich überwunden," Munich Reprints in Economics 19932, University of Munich, Department of Economics.
  2. Antonio Montañés & Marcos Sanso-Navarro, . "Another look at long-horizon uncovered interest parity," Studies on the Spanish Economy 221, FEDEA.
  3. Paul Blackley, 2009. "The change in aggregate budget behavior in the 1990s: a cointegration-error correction model analysis," Public Choice, Springer, vol. 138(3), pages 475-482, March.
  4. Kai Carstensen, 2003. "Is European Money Demand Still Stable?," Kiel Working Papers 1179, Kiel Institute for the World Economy.
  5. Manuel Ramos Francia & Daniel Chiquiar, 2004. "Bilateral Trade and Business Cycle Synchronization: Evidence from Mexico and United States Manufacturing Industries," Working Papers 2004-05, Banco de México.
  6. Chiquiar, Daniel & Ramos-Francia, Manuel, 2005. "Trade and business-cycle synchronization: evidence from Mexican and U.S. manufacturing industries," The North American Journal of Economics and Finance, Elsevier, vol. 16(2), pages 187-216, August.
  7. Pierre Siklos, 2006. "What Can We Learn from Comprehensive Data Revisions for Forecasting Inflation: Some US Evidence," Working Papers eg0049, Wilfrid Laurier University, Department of Economics, revised 2006.

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