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Trend Adjustment Prior to Testing for the Cointegrating Rank of a Vector Autoregressive Process

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  • Pentti Saikkonen
  • Helmut Lutkepohl

Abstract

Testing the cointegrating rank of a vector autoregressive process that may have a deterministic linear trend is considered. Previous proposals for dealing with such a situation are either to allow for a deterministic trend term in computing a suitable test statistic or else to remove the linear trend first and then derive the test statistic from the trend‐adjusted data. In this study the latter approach is considered and a new method for trend removal is proposed that is based on estimating the trend parameters under the null hypothesis. Likelihood ratio and Lagrange multiplier type test statistics are derived on the basis of the trend‐adjusted data and their asymptotic distributions are considered under the null hypothesis and under local alternatives. A simulation comparison with other proposals is performed.

Suggested Citation

  • Pentti Saikkonen & Helmut Lutkepohl, 2000. "Trend Adjustment Prior to Testing for the Cointegrating Rank of a Vector Autoregressive Process," Journal of Time Series Analysis, Wiley Blackwell, vol. 21(4), pages 435-456, July.
    • Handle: RePEc:bla:jtsera:v:21:y:2000:i:4:p:435-456
    DOI: 10.1111/1467-9892.00192
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    2. Stefanescu, Razvan & Dumitriu, Ramona & Nistor, Costel, 2009. "Analysis of the dynamic relation between the currency rates and the interest rates from Romania and euro area before and during the financial crisis," MPRA Paper 41744, University Library of Munich, Germany, revised 04 Mar 2010.
    3. Beckmann, Joscha & Czudaj, Robert, 2013. "Gold as an inflation hedge in a time-varying coefficient framework," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 208-222.
    4. Kalou, Sofia & Paleologou, Suzanna-Maria, 2012. "The twin deficits hypothesis: Revisiting an EMU country," Journal of Policy Modeling, Elsevier, vol. 34(2), pages 230-241.
    5. Karaman Örsal, Deniz Dilan & Droge, Bernd, 2014. "Panel cointegration testing in the presence of a time trend," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 377-390.
    6. Deniz Dilan Karaman Örsal, 2021. "Long-run economic determinants of asylum applications," Economics Bulletin, AccessEcon, vol. 41(1), pages 48-59.
    7. Karaman Örsal, Deniz Dilan & Arsova, Antonia, 2017. "Meta-analytic cointegrating rank tests for dependent panels," Econometrics and Statistics, Elsevier, vol. 2(C), pages 61-72.
    8. Eleftheriou, Maria, 2009. "Monetary policy in Germany: A cointegration analysis on the relevance of interest rate rules," Economic Modelling, Elsevier, vol. 26(5), pages 946-960, September.
    9. Antonia Arsova, 2021. "Exchange rate pass-through to import prices in Europe: a panel cointegration approach," Empirical Economics, Springer, vol. 61(1), pages 61-100, July.
    10. Lutkepohl, Helmut & Saikkonen, Pentti & Trenkler, Carsten, 2003. "Comparison of tests for the cointegrating rank of a VAR process with a structural shift," Journal of Econometrics, Elsevier, vol. 113(2), pages 201-229, April.
    11. Mylonidis, Nikolaos & Paleologou, Suzanna-Maria, 2011. "The real uncovered interest parity: The case of Canada and the USA," Journal of Policy Modeling, Elsevier, vol. 33(2), pages 255-267, March.
    12. Ben-Salha, Ousama & Jaidi, Zied, 2014. "Some new evidence on the determinants of money demand in developing countries – A case study of Tunisia," The Journal of Economic Asymmetries, Elsevier, vol. 11(C), pages 30-45.
    13. Skrobotov, Anton, 2021. "Structural breaks in cointegration models: Multivariate case," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 64, pages 83-106.
    14. Glauben, Thomas & Loy, Jens-Peter & Körner, Julia, 2007. "Der Einfluss der Euro-Einführung auf die Preisentwicklung bei frischen Lebensmitteln in Deutschland," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 127(3), pages 457-485.
    15. Niklas Ahlgren & Mikael Juselius, 2012. "Tests for cointegration rank and the initial condition," Empirical Economics, Springer, vol. 42(3), pages 667-691, June.
    16. Schreiber, Sven, 2008. "Did work-sharing work in France? Evidence from a structural co-integrated VAR model," European Journal of Political Economy, Elsevier, vol. 24(2), pages 478-490, June.
    17. Boswijk, H. Peter & Jansson, Michael & Nielsen, Morten Ørregaard, 2015. "Improved likelihood ratio tests for cointegration rank in the VAR model," Journal of Econometrics, Elsevier, vol. 184(1), pages 97-110.
    18. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.
    19. Antonia Arsova, 2019. "Exchange rate pass-through to import prices in Europe: A panel cointegration approach," Working Paper Series in Economics 384, University of Lüneburg, Institute of Economics.
    20. Rodriguez Gonzalez, Miguel & Wegener, Christoph & Basse, Tobias, 2022. "Re-investigating the insurance-growth nexus using common factors," Finance Research Letters, Elsevier, vol. 46(PA).
    21. Lusine Lusinyan & John Thornton, 2011. "Unit roots, structural breaks and cointegration in the UK public finances, 1750-2004," Applied Economics, Taylor & Francis Journals, vol. 43(20), pages 2583-2592.
    22. Karaman Örsal, Deniz Dilan, 2014. "Do the global stochastic trends drive the real house prices in OECD countries?," Economics Letters, Elsevier, vol. 123(1), pages 9-13.
    23. Koivu, Tuuli, 2012. "Monetary policy, asset prices and consumption in China," Economic Systems, Elsevier, vol. 36(2), pages 307-325.
    24. Eleftheriou, Maria, 2017. "Did the Bundesbank react to the US dollar exchange rate?," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 235-244.

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