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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)

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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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Publisher 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
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Handle: RePEc:ins:quaeco:qf0109

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

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Find related papers by JEL classification:
C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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  1. repec:cup:etheor:v:11:y:1995:i:5:p:984-1014 is not listed on IDEAS
  2. 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.
  3. 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. [Downloadable!] (restricted)
  4. 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.
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  5. Paruolo Paolo, . "The power of lambda max," Economics and Quantitative Methods qf0004, Department of Economics, University of Insubria.
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  6. 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 and Southwestern Finance Association, vol. 15(3), pages 285-96, Fall.
  7. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
  9. Paruolo Paolo, . "LR cointegration tests when some cointegrating relations are known," Economics and Quantitative Methods qf0106, Department of Economics, University of Insubria.
  10. Johansen, Soren, 1992. "Determination of Cointegration Rank in the Presence of a Linear Trend," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 383-97, August.
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  11. Paruolo Paolo, . "On Monte Carlo Estimation of Relative Power," Economics and Quantitative Methods qf0112, Department of Economics, University of Insubria.
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  12. 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. [Downloadable!]
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