Inappropriate Detrending and Spurious Cointegration
AbstractThe empirical literature is abundant with detrended cointegration, where cointegration relations are estimated with deterministic trend terms. The use of detrended cointegration will mask important time series properties, however, because trend and cointegration indicate both deterministic and stochastic common trends. Cointegration with and without detrending shows markedly different implications on their long-run relations. A series of Monte Carlo experiments show that inappropriately detrended time series often exhibit cointegration although time series are designed to contain no cointegration. That is, inappropriately detrended time series tend to show spurious cointegration. Foreign exchange rates are analyzed to show the relevance and importance of the inappropriate detrended in cointegration analysis
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 624.
Date of creation: 11 Aug 2004
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Determistic trend; stochastic trend; foreign exchange rates; Monte Carlo study;
Other versions of this item:
- Heejoon Kang, 2006. "Inappropriate Detrending and Spurious Cointegration," Working Papers 2006-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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