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End-of-Sample Cointegration Breakdown Tests

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  • Donald W.K. Andrews

    ()
    (Yale University, Cowles Foundation)

  • Jae-Young Kim

    ()
    (SUNY at Albany)

Abstract

This paper introduces tests for cointegration breakdown that may occur over a relatively short time period, such as at the end of the sample. The breakdown may be due to a shift in the cointegrating vector or due to a shift in the errors from being I(0) to being I(1). Tests are introduced based on the post-breakdown sum of squared residuals and the post-breakdown sum of squared reverse partial sums of residuals. Critical values are provided using a parametric subsampling method. The regressors in the model are taken to be arbitrary linear combinations of deterministic, stationary, and integrated random variables. The tests are asymptotically valid when the number of observations in the breakdown period, m, is fixed and finite as the total sample size, T+m, goes to infinity. The tests are asymptotically valid under weak conditions. Simulation results indicate that the tests work well in the scenarios considered. Use of the tests is illustrated by testing for interest rate parity breakdown during the Asian financial crisis of 1997.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm344.

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Date of creation: 28 Jul 2004
Date of revision:
Handle: RePEc:ysm:somwrk:ysm344

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Web page: http://icf.som.yale.edu/
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Related research

Keywords: Cointegration; Least Squares Estimator; Model Breakdown; Parameter Change Test; Structural Change;

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Cited by:
  1. Paul Blackley, 2009. "The change in aggregate budget behavior in the 1990s: a cointegration-error correction model analysis," Public Choice, Springer, vol. 138(3), pages 475-482, March.
  2. Antonio Montañés & Marcos Sanso-Navarro, . "Another look at long-horizon uncovered interest parity," Studies on the Spanish Economy 221, FEDEA.
  3. Chiquiar, Daniel & Ramos-Francia, Manuel, 2005. "Trade and business-cycle synchronization: evidence from Mexican and U.S. manufacturing industries," The North American Journal of Economics and Finance, Elsevier, vol. 16(2), pages 187-216, August.
  4. Carstensen, Kai & Gern, Klaus-Jürgen & Kamps, Christophe & Scheide, Joachim, 2003. "Euroland: Stagnation wird allmählich überwunden," Open Access Publications from Kiel Institute for the World Economy 3081, Kiel Institute for the World Economy (IfW).
  5. Pierre Siklos, 2006. "What Can We Learn from Comprehensive Data Revisions for Forecasting Inflation: Some US Evidence," Working Papers eg0049, Wilfrid Laurier University, Department of Economics, revised 2006.
  6. Manuel Ramos Francia & Daniel Chiquiar, 2004. "Bilateral Trade and Business Cycle Synchronization: Evidence from Mexico and United States Manufacturing Industries," Working Papers 2004-05, Banco de México.
  7. Kai Carstensen, 2003. "Is European Money Demand Still Stable?," Kiel Working Papers 1179, Kiel Institute for the World Economy.

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