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Testing for Cointegration Using the Johansen Methodology When Variables Are Near-Integrated

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  • Pär Österholm
  • Erik Hjalmarsson

Abstract

We investigate the properties of Johansen''s (1988, 1991) maximum eigenvalue and trace tests for cointegration under the empirically relevant situation of near-integrated variables. Using Monte Carlo techniques, we show that in a system with near-integrated variables, the probability of reaching an erroneous conclusion regarding the cointegrating rank of the system is generally substantially higher than the nominal size. The risk of concluding that completely unrelated series are cointegrated is therefore non-negligible. The spurious rejection rate can be reduced by performing additional tests of restrictions on the cointegrating vector(s), although it is still substantially larger than the nominal size.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/141.

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Length: 19
Date of creation: 01 Jun 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/141

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Keywords: Economic models; cointegration; inflation; nominal interest rate; equation; nominal interest rates; sample size; statistics; real exchange rates; probability; time series; monte carlo simulations; real interest rate; confidence intervals; confidence interval; correlations; statistic; inflation rate; maximum likelihood estimation; predictability; vector autoregression; statistical model; equations; econometrics; constant term; maximum likelihood estimator; samples; number of variables; inflation rates; monte carlo simulation; hypothesis testing; correlation; monetary economics;

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Citations

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Cited by:
  1. Brissimis, Sophocles & Migiakis, Petros, 2010. "Inflation persistence and the rationality of inflation expectations," MPRA Paper 29052, University Library of Munich, Germany.
  2. Österholm, Pär, 2009. "Unemployment and Labour Force Participation in Sweden," Working Paper 113, National Institute of Economic Research.
  3. Meredith Beechey & Erik Hjalmarsson & Par Osterholm, 2008. "Testing the expectations hypothesis when interest rates are near integrated," International Finance Discussion Papers 953, Board of Governors of the Federal Reserve System (U.S.).
  4. Mesbah Motamed & Kenneth A. Foster & Wallace E. Tyner, 2008. "Applying cointegration and error correction to measure trade linkages: maize prices in the United States and Mexico," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 29-39, 07.
  5. repec:asi:ajoerj:2013:p:363-380 is not listed on IDEAS
  6. Chrz, Stepan & Hruby, Zdenek & Janda, Karel & Kristoufek, Ladislav, 2013. "Provazanost trhu potravin, biopaliv a fosilnich paliv
    [Interconnections within food, biofuel, and fossil fuel markets]
    ," MPRA Paper 43958, University Library of Munich, Germany.
  7. Ciner, Cetin, 2011. "Eurocurrency interest rate linkages: A frequency domain analysis," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 498-505, October.
  8. Marcus Cobb, 2009. "Forecasting Chilean Inflation From Disaggregate Components," Working Papers Central Bank of Chile 545, Central Bank of Chile.
  9. Przystupa, Jan & Wróbel, Ewa, 2009. "Asymmetry of the exchange rate pass-through: An exercise on the Polish data," MPRA Paper 17660, University Library of Munich, Germany.
  10. Duran-Vazquez, Rocio & Lorenzo-Valdes, Arturo & Ruiz-Porras, Antonio, 2011. "Valuation of Latin-American stock prices with alternative versions of the Ohlson model: An investigation of cointegration relationships with time-series and panel-data," MPRA Paper 31354, University Library of Munich, Germany.
  11. Balazs Egert, 2012. "Nominal and Real Exchange Rate Models in South Africa: How Robust are they?," CESifo Working Paper Series 3853, CESifo Group Munich.
  12. Erik Hjalmarsson & Par Osterholm, 2007. "A residual-based cointegration test for near unit root variables," International Finance Discussion Papers 907, Board of Governors of the Federal Reserve System (U.S.).
  13. Haruna Issahaku & Yazidu Uztarz & Paul Bata Domanban, 2013. "Macroeconomic Variables and Stock Market Returns in Ghana: Any Causal Link?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(8), pages 1044-1062, August.
  14. Tsen, Wong Hock, 2011. "The real exchange rate determination: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 800-811, October.

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