Inappropriate Detrending and Spurious Cointegration
AbstractThe empirical literature is abundant with detrended cointegration, where cointegration relationships are tested and estimated with deterministic trend terms. Cointegration is, however, critically dependent on whether time series is detrended or not. A series of Monte Carlo experiments show that inappropriately detrended time series tend to exhibit a spurious cointegration. Although true time series are known not to be cointegrated, inappropriately detrended series tend to be cointegrated. Foreign exchange rates are analyzed to demonstrate the relevance and importance of the inappropriate detrending in the cointegration analysis.
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Bibliographic InfoPaper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2006-14.
Date of creation: 2006
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Deterministic trend; Foreign exchange rates; Monte Carlo study; Stochastic trend;
Other versions of this item:
- Heejoon Kang, 2004. "Inappropriate Detrending and Spurious Cointegration," Econometric Society 2004 Far Eastern Meetings 624, Econometric Society.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-10 (All new papers)
- NEP-ECM-2007-03-10 (Econometrics)
- NEP-IFN-2007-03-10 (International Finance)
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