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The Power of Bootstrap Tests of Cointegration Rank with Financial Time Series

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Author Info

  • Ahlgren, Niklas

    ()
    (Hanken School of Economics)

  • Antell, Jan

    ()
    (Hanken School of Economics)

Abstract

Bootstrap likelihood ratio tests of cointegration rank are commonly used because they tend to have rejection probabilities that are closer to the nominal level than the rejection probabilities of the correspond- ing asymptotic tests. The e¤ect of bootstrapping the test on its power is largely unknown. We show that a new computationally inexpensive procedure can be applied to the estimation of the power function of the bootstrap test of cointegration rank. The bootstrap test is found to have a power function close to that of the level-adjusted asymp- totic test. The bootstrap test estimates the level-adjusted power of the asymptotic test highly accurately. The bootstrap test may have low power to reject the null hypothesis of cointegration rank zero, or underestimate the cointegration rank. An empirical application to Euribor interest rates is provided as an illustration of the findings.

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Bibliographic Info

Paper provided by Hanken School of Economics in its series Working Papers with number 541.

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Length: 43 pages
Date of creation: 11 Jun 2009
Date of revision:
Handle: RePEc:hhb:hanken:0541

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Postal: Hanken School of Economics, Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland
Phone: +358-9-431 331
Fax: +358-9-431 33 333
Web page: http://www.hanken.fi
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Related research

Keywords: Cointegration; Likelihood ratio test; Test power; Bootstrap;

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  1. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
  2. Saikkonen, Pentti & Lütkepohl, Helmut, 1997. "Local power of likelihood ratio tests for the cointegrating rank of a VAR process," SFB 373 Discussion Papers 1997,58, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Davidson, Russell & MacKinnon, James G., 2006. "The power of bootstrap and asymptotic tests," Journal of Econometrics, Elsevier, vol. 133(2), pages 421-441, August.
  4. Horowitz, Joel L., 1994. "Bootstrap-based critical values for the information matrix test," Journal of Econometrics, Elsevier, vol. 61(2), pages 395-411, April.
  5. Doornik, Jurgen A, 1998. " Approximations to the Asymptotic Distributions of Cointegration Tests," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 573-93, December.
  6. Hansen, B.E., 1992. "Autoregressive Conditional Density Estimation," RCER Working Papers 322, University of Rochester - Center for Economic Research (RCER).
  7. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  8. Soren Johansen, 2002. "A Small Sample Correction for the Test of Cointegrating Rank in the Vector Autoregressive Model," Econometrica, Econometric Society, vol. 70(5), pages 1929-1961, September.
  9. Ahlgren, Niklas & Antell, Jan, 2006. "Bootstrap and Fast Double Bootstrap Tests of Cointegration Rank with Financial Time Series," Working Papers 519, Hanken School of Economics.
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