Bootstrap co-integration rank testing: the role of deterministic variables and initial values in the bootstrap recursion
AbstractIn this paper we investigate the role of deterministic components and initial values in bootstrap likelihood ratio type tests of co-integration rank. A number of bootstrap procedures have been proposed in the recent literature some of which include estimated deterministic components and non-zero initial values in the bootstrap recursion while others do the opposite. To date, however, there has not been a study into the relative performance of these two alternative approaches. In this paper we fill this gap in the literature and consider the impact of these choices on both OLS and GLS de-trended tests, in the case of the latter proposing a new bootstrap algorithm as part of our analysis. Overall, for OLS de-trended tests our findings suggest that it is preferable to take the computationally simpler approach of not including estimated deterministic components in the bootstrap recursion and setting the initial values of the bootstrap recursion to zero. For GLS de-trended tests, we find that the approach of Trenkler (2009), who includes a restricted estimate of the deterministic component in the bootstrap recursion, can improve finite sample behaviour further.
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Bibliographic InfoPaper provided by University of Nottingham, Granger Centre for Time Series Econometrics in its series Discussion Papers with number 10/04.
Date of creation: Mar 2010
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Co-integration; trace tests; i.i.d. bootstrap; OLS and GLS de-trending;
Other versions of this item:
- Giuseppe Cavaliere & A. M. Robert Taylor & Carsten Trenkler, 2013. "Bootstrap Cointegration Rank Testing: The Role of Deterministic Variables and Initial Values in the Bootstrap Recursion," Econometric Reviews, Taylor and Francis Journals, vol. 32(7), pages 814-847, October.
- NEP-ALL-2010-04-11 (All new papers)
- NEP-ECM-2010-04-11 (Econometrics)
- NEP-ETS-2010-04-11 (Econometric Time Series)
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