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Testing for Structural Breaks

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Author Info

  • Allan W. Gregory
  • James M. Nason

Abstract

The purpose of this paper is to investigate the tests of Hansen (1991) to detect structural breaks in cointegrated relations using Monte Carlo methods. The evaluation takes place within the linear quadratic model. The evidence for a single regressor suggests that the test have proper size and that the power is good provided the cost of adjustment is low. In addition to the tests of Hansen, we consider the sensitivity of the augmented Dicky-Fuller (ADF) teest for cointegration in the presence of a structural break. Our Monte Carlo experiments show that the ADF test suffers a substantial loss of power (a failure to reject the null of no cointegration). As a practical example we consider the stability of the long-run coefficients in annual U.S. money demand.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_827.pdf
File Function: First version 1991
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 827.

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Length: 38 pages
Date of creation: Jul 1991
Date of revision:
Handle: RePEc:qed:wpaper:827

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Related research

Keywords: linear quadratic; cointegration; structural breaks;

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Cited by:
  1. Kuo, Biing-Shen, 1998. "Test for partial parameter instability in regressions with I(1) processes," Journal of Econometrics, Elsevier, vol. 86(2), pages 337-368, June.
  2. Kuikeu, Oscar, 2011. "Comment la dernière crise financière a relancé le débat relatif à l'arrimage du fcfa à l'euro
    [How the recent financial crisis have revived the debate on the parity between fcfa and euro]
    ," MPRA Paper 32077, University Library of Munich, Germany.
  3. Steven Cook, 2004. "Spurious rejection by cointegration tests incorporating structural change in the cointegrating relationship," Applied Economics Letters, Taylor & Francis Journals, vol. 11(14), pages 879-884.
  4. Kuikeu, Oscar, 2011. "Arguments contre la zone franc
    [Against the cfa franc zone]
    ," MPRA Paper 33710, University Library of Munich, Germany.
  5. Funke, Michael, 2001. "Money demand in Euroland," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 701-713, October.
  6. James M. Nason, 1991. "The permanent income hypothesis when the bliss point is stochastic," Discussion Paper / Institute for Empirical Macroeconomics 46, Federal Reserve Bank of Minneapolis.
  7. Giorgia Palladini & Richard Portes, 2011. "Sovereign CDS and Bond Pricing Dynamics in the Euro-area," NBER Working Papers 17586, National Bureau of Economic Research, Inc.
  8. Michael D. Bordo & Lars Jonung & Pierre Siklos, 1993. "The Common Development of Institutional Change as Measured by Income Velocity: A Century of Evidence from Industrialized Countries," NBER Working Papers 4379, National Bureau of Economic Research, Inc.
  9. Alain Durré, 2006. "The Liquidity Premium in the Money Market: A Comparison of the German Mark Period and the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 7, pages 163-187, 05.
  10. Olusegun A. Omisakin & Abimbola M. Oyinlola & Oluwatosin A. Adeniyi, 2012. "Modeling Gasoline Demand with Structural Breaks:New Evidence from Nigeria," International Journal of Energy Economics and Policy, Econjournals, vol. 2(1), pages 1-9.
  11. Di Iorio, Francesca & Fachin, Stefano, 2006. "Testing for breaks in cointegrated panels," MPRA Paper 3280, University Library of Munich, Germany.

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