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On the small sample properties of weak exogeneity tests in cointegrated VAR models

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  • Brüggemann, Ralf

Abstract

We investigate the small sample properties of two types of weak exogeneity tests in cointegrated VAR models that are frequently used in applied work. The first one is the standard Likelihood Ratio (LR) test in the Johansen framework. The second test is based on mapping the cointegrated VAR model into VECM representation and then reducing the model using some model selection procedure before testing the significance of the alpha parameters. Results from Monte Carlo experiments indicate severe size distortions in both test types in small samples. We suggest a bootstrap version of the LR test, which can be used for size correction. --

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Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2002,2.

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Date of creation: 2002
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Handle: RePEc:zbw:sfb373:20022

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Keywords: Cointegration; weak exogeneity; bootstrap test; Subset VECM;

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  1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  2. David F. Hendry & Neil R. Ericsson, 1990. "Modeling the demand for narrow money in the United Kingdom and the United States," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 383, Board of Governors of the Federal Reserve System (U.S.).
  3. Juselius, Katarina, 1996. "An Empirical Analysis of the Changing Role of the German Bundesbank after 1983," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(4), pages 791-819, November.
  4. Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, Elsevier, vol. 69(1), pages 211-240, September.
  5. Jurgen A. Doornik & David F. Hendry & Bent Nielsen, 1998. "Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 12(5), pages 533-572, December.
  6. JØrgen Wolters & Helmut LØtkepohl, 1998. "A money demand system for German M3," Empirical Economics, Springer, Springer, vol. 23(3), pages 371-386.
  7. Brüggemann, Ralf & Lütkepohl, Helmut, 2000. "Lag selection in subset VAR models with an application to a US monetary system," SFB 373 Discussion Papers 2000,37, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  8. Podivinsky, Jan M., 1992. "Small sample properties of tests of linear restrictions on cointegrating vectors and their weights," Economics Letters, Elsevier, Elsevier, vol. 39(1), pages 13-18, May.
  9. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  10. Horowitz, Joel L. & Savin, N. E., 2000. "Empirically relevant critical values for hypothesis tests: A bootstrap approach," Journal of Econometrics, Elsevier, Elsevier, vol. 95(2), pages 375-389, April.
  11. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198283164, October.
  12. Urbain, Jean-Pierre, 1995. "Partial versus full system modelling of cointegrated systems an empirical illustration," Journal of Econometrics, Elsevier, Elsevier, vol. 69(1), pages 177-210, September.
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