Cointegration Analysis in the Presence of Outliers
AbstractThe 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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Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 03-05.
Length: 22 pages
Date of creation: Mar 2003
Date of revision:
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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; Dynamic Treatment Effect Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-02 (All new papers)
- NEP-ECM-2003-04-04 (Econometrics)
- NEP-ETS-2003-04-02 (Econometric Time Series)
- NEP-RMG-2003-04-02 (Risk Management)
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