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Determining the number of cointegrating relations under rank constraints

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Author Info

  • Cavaliere Giuseppe

    (Department of Statistical Science, University of Bologna, Italy)

  • Fanelli Luca

    ()
    (Department of Statistical Sciences, University of Bologna, Italy)

  • Paruolo Paolo

    ()
    (Department of Economics, University of Insubria, Italy)

Abstract

This paper proposes likelihood-based procedures for determining the number of cointegrating vectors in the presence of constraints on the cointegration rank. The tests can be applied when a priori information suggests a lower bound on the number of common stochastic trends in the system. The likelihood ratio trace and and lambda max tests are obtained as special cases of the present setup. The tests are easy to implement and have comparable asymptotic power with respect to the trace test; it is also shown that the constrained tests are more powerful for some local alternatives.

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File URL: http://eco.uninsubria.it/dipeco/Quaderni/files/QF2001_17.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Insubria in its series Economics and Quantitative Methods with number qf0109.

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Length: 31 pages
Date of creation: Jul 2001
Date of revision:
Handle: RePEc:ins:quaeco:qf0109

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Related research

Keywords: Cointegration rank; Likelihood ratio; Trace test; Asymptotic power;

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References

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  1. repec:cup:etheor:v:11:y:1995:i:5:p:984-1014 is not listed on IDEAS
  2. Paruolo Paolo, . "The power of lambda max," Economics and Quantitative Methods qf0004, Department of Economics, University of Insubria.
  3. Paruolo Paolo, . "LR cointegration tests when some cointegrating relations are known," Economics and Quantitative Methods qf0106, Department of Economics, University of Insubria.
  4. Johansen, S., 1991. "Determination of Cointegration Rank in the Presence of a Linear Trend," Papers 76a, Helsinki - Department of Economics.
  5. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  6. Paolo Paruolo, 2002. "On Monte Carlo estimation of relative power," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 65-75, June.
  7. Pantula, Sastry G., 1989. "Testing for Unit Roots in Time Series Data," Econometric Theory, Cambridge University Press, vol. 5(02), pages 256-271, August.
  8. Mougoue, Mbodja, 1992. "The Term Structure of Interest Rates as a Cointegrated System: Empirical Evidence from the Eurocurrency Market," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 15(3), pages 285-96, Fall.
  9. Horvath, Michael T.K. & Watson, Mark W., 1995. "Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified," Econometric Theory, Cambridge University Press, vol. 11(05), pages 984-1014, October.
  10. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
  11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  12. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  13. Dominguez, Emilio & Novales, Alfonso, 2000. "Testing the expectations hypothesis in Eurodeposits," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 713-736, October.
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