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Testing for Stochastic Cointegration and Evidence for Present Value Models

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Author Info
Brendan McCabe (Liverpool)
Stephen Leybourne (Nottingham)
David Harris (Melbourne)

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Abstract

Using the stochastic integration/cointegration framework of Harris, McCabe and Leybourne (2002) we revisit the problem of assessing the empirical evidence for or against the present value class of models in the bond and stock markets. This framework allows for volatility in excess of that catered for by the conventional integration/cointegration paradigm by introducing nonlinear heteroscedasticity. We propose a test for stochastic cointegration against the alternative of no cointegration and a secondary test for stationary cointegration against the heteroscedastic alternative. Asymptotic distributions of these tests under their respective null hypotheses are derived and consistency under their respective alternatives is established. In contrast to conventional cointegration tests, which we show via simulation are unreliable in the presence of the kind of volatility typical of financial data, our tests are able to uncover new cointegration evidence in favour of the present value model, particularly in the bond market.

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Paper provided by EconWPA in its series Econometrics with number 0311009.

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Date of creation: 26 Nov 2003
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Handle: RePEc:wpa:wuwpem:0311009

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Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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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. M. Lucey, Brian & Voronkova, Svitlana, 2005. "Russian equity market linkages before and after the 1998 crisis: Evidence from time-varying and stochastic cointegration tests," BOFIT Discussion Papers 12/2005, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  2. Raj Aggarwal & Brian M. Lucey & Sunil K. Mohanty, 2006. "The Forward Exchange Rate Bias Puzzle: Evidence from New Cointegration Tests," The Institute for International Integration Studies Discussion Paper Series iiisdp123, IIIS. [Downloadable!]
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