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Testing for Cointegration in Misspecified Systems –A Monte Carlo Study of Size Distortions

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  • Österholm, Pär

    ()
    (Department of Economics)

Abstract

When dealing with time series that are integrated of order one, the concept of cointegration becomes crucial for the specification of a model. Using the best available tests, one can reduce the probability of estimating econometric models that are misspecified. This paper investigates the small sample performance of four well-known cointegration tests when a system has been misspecified by leaving out one relevant explanatory variable from a system with one cointegrating vector. In a Monte Carlo study, the size distortions of the Augmented Engle-Granger (Engle and Granger, 1987), Johansen’s (1988) maximum eigenvalue, Johansen’s (1991) trace and the Boswijk (1989) Wald tests are examined. The Johansen trace test adjusted by the finite sample correction of Reinsel and Ahn (1988) is found to have the most robust performance when lag length in the test equations is chosen according to traditional information criteria.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2003:21.

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Length: 32 pages
Date of creation: 15 Aug 2003
Date of revision:
Publication status: Published in Applied Economics Letters, 2004, pages 919-924.
Handle: RePEc:hhs:uunewp:2003_021

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Cointegration; Tests; Monte Carlo;

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  15. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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