Tests for Cointegration Rank and the Initial Condition
AbstractMany economic events involve initial observations that substantially deviate from long-run steady state. Initial conditions of this type have been found to impact diversely on the power of univariate unit root tests, whereas the impact on multivariate tests is largely unknown. This paper investigates the impact of the initial condition on tests for cointegration rank. We compare the local power of the widely used likelihood ratio (LR) test with the local power of a test based on the eigenvalues of the companion matrix. We find that the power of the LR test is increasing in the magnitude of the initial condition, whereas the power of the other test is decreasing. The behaviour of the tests is investigated in an application to price convergence.
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Bibliographic InfoPaper provided by Hanken School of Economics in its series Working Papers with number 539.
Length: 43 pages
Date of creation: 13 May 2009
Date of revision:
Publication status: Forthcoming as Ahlgren, Niklas and Mikael Juselius, 'Tests for Cointegration Rank and the Initial Condition ' in Empirical Economics., 2011.
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Postal: Hanken School of Economics, Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland
Phone: +358-9-431 331
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Web page: http://www.hanken.fi
More information through EDIRC
asymptotic local power; cointegration; companion matrix; convergence; initial condition; likelihood ratio test; unit root;
Other versions of this item:
- Niklas Ahlgren & Mikael Juselius, 2012. "Tests for cointegration rank and the initial condition," Empirical Economics, Springer, vol. 42(3), pages 667-691, June.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-05-23 (All new papers)
- NEP-ECM-2009-05-23 (Econometrics)
- NEP-ETS-2009-05-23 (Econometric Time Series)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ahlgren, Niklas & Antell, Jan, 2006.
"Bootstrap and Fast Double Bootstrap Tests of Cointegration Rank with Financial Time Series,"
519, Hanken School of Economics.
- Ahlgren, N. & Antell, J., 2008. "Bootstrap and fast double bootstrap tests of cointegration rank with financial time series," Computational Statistics & Data Analysis, Elsevier, vol. 52(10), pages 4754-4767, June.
- Böckerman, Petri & Johansson, Edvard & Jousilahti, Pekka & Uutela, Antti, 2007. "The Physical Strenuousness of Work is Slightly Associated with an Upward Trend in the Body Mass Index," Working Papers 523, Hanken School of Economics.
- Johansson, Edvard & Böckerman, Petri & Kiiskinen, Urpo & Heliövaara, Markku, 2007. "The Effect of Obesity on Wages and Employment: The Difference Between Having a High BMI and Being Fat," Working Papers 528, Hanken School of Economics.
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