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The Power of Cointegration Tests

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  • Kremers, Jeroen J M
  • Ericsson, Neil R
  • Dolado, Juan J

Abstract

A cointegration test statistic based upon estimation of an error-correction model can be approximately normally distributed when no cointegration is present. By contrast, the equivalent Dickey-Fuller statistic applied to residuals from a static relationship has a nonstandard asymptotic distribution. When cointegration exists, the error-correction test generally is more powerful than the Dickey-Fuller test. These differences arise because the latter imposes a possibly invalid common factor restriction. The issue is general and has ramifications for system-based cointegration tests. Monte Carlo analysis and an empirical study of U.K. money demand demonstrate the differences in power. Copyright 1992 by Blackwell Publishing Ltd

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 54 (1992)
Issue (Month): 3 (August)
Pages: 325-48

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Handle: RePEc:bla:obuest:v:54:y:1992:i:3:p:325-48
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