A simple approach to robust inference in a cointegrating system

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A simple approach to robust inference in a cointegrating system

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Jonathan H. Wright

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Jonathan H. Wright

Abstract

Cointegration requires all the variables in the system to have exact unit roots; accordingly it is conventional for researchers to test for a unit root in each variable prior to a cointegration analysis. Unfortunately, these unit root tests are not powerful. Meanwhile, conventional cointegration methods are not at all robust to slight violations of the requirement that each variable have a unit root. In this paper I show how this difficulty may be circumvented by instrumenting the regressors in the cointegrating regression by deterministic polynomial time trends or by artificially generated random walks.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 654.

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Date of creation: 1999
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Handle: RePEc:fip:fedgif:654

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Related research
Keywords: Cointegration ; Statistics;

This paper has been announced in the following NEP Reports:

NEP-ALL-2000-04-17 (All new papers)
NEP-ECM-2000-04-17 (Econometrics)
NEP-ETS-2000-04-17 (Econometric Time Series)

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Other versions:
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Other versions:
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Other versions:
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