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Cointegration Analysis in the Presence of Outliers

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Author Info
Heino Bohn Nielsen (University of Copenhagen Institute of Economics)
Abstract

The effects of innovational outliers and additive outliers in cointegrated vector autoregressions are examined and it is analyzed how outliers can be modelled with dummy variables. Using a Monte Carlo simulation it is illustrated how misspecified dummies may distort inference on the cointegration rank in finite samples. That questions the common practice in applied cointegration analyses of including unrestricted dummy variables to account for large residuals. Instead it is suggested to test the adequacy of a particular specification of dummies prior to determining the cointegration rank. The points are illustrated on a UK money demand data set

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 03-05.

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Length: 22 pages
Date of creation: Mar 2003
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Handle: RePEc:kud:kuiedp:0305

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Related research
Keywords: cointegrated VAR; innovational outlier; additive outlier; dummy variables; Monte Carlo;

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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hendry, David F & Doornik, Jurgen A, 1994. "Modelling Linear Dynamic Econometric Systems," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(1), pages 1-33, February.
  2. Larsson, Rolf & Villani, Mattias, 2001. "A distance measure between cointegration spaces," Economics Letters, Elsevier, vol. 70(1), pages 21-27, January. [Downloadable!] (restricted)
  3. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
  4. Nielsen, Bent & Rahbek, Anders, 2000. " Similarity Issues in Cointegration Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(1), pages 5-22, February. [Downloadable!] (restricted)
  5. Doornik, Jurgen A & Hendry, David F & Nielsen, Bent, 1998. " Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Blackwell Publishing, vol. 12(5), pages 533-72, December. [Downloadable!] (restricted)
  6. Franses, Philip Hans & Haldrup, Niels, 1994. "The Effects of Additive Outliers on Tests for Unit Roots and Cointegration," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 471-78, October.
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  7. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249. [Downloadable!]
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  8. Pollak, Robert A. & Wales, Terence J., 1991. "The likelihood dominance criterion : A new approach to model selection," Journal of Econometrics, Elsevier, vol. 47(2-3), pages 227-242, February. [Downloadable!] (restricted)
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  9. Shin, Dong Wan & Sarkar, Sahadeb & Lee, Jong Hyup, 1996. "Unit root tests for time series with outliers," Statistics & Probability Letters, Elsevier, vol. 30(3), pages 189-197, October. [Downloadable!] (restricted)
  10. Doornik, Jurgen A, 1998. " Approximations to the Asymptotic Distributions of Cointegration Tests," Journal of Economic Surveys, Blackwell Publishing, vol. 12(5), pages 573-93, December. [Downloadable!] (restricted)
  11. Katarina Juselius & David F. Hendry, 2000. "Explaining Cointegration Analysis: Part II," Discussion Papers 00-20, University of Copenhagen. Department of Economics. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David F. Hendry & Carlos Santos, 2004. "Regression Models with Data-based Indicator Variables," Economics Papers 2004-W13, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  2. David F. Hendry & Carlos Santos, 2004. "Regression Models with Data-based Indicator Variables," Economics Papers 2004-W04, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  3. Bigsten, Arne & Durevall, Dick, 2004. "Trade Reform and Wage Inequality in Kenya, 1964-2000," Working Papers in Economics 148, Göteborg University, Department of Economics. [Downloadable!]
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