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Nonparametric Testing for Linearity in Cointegrated Error-Correction Models

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  • Seo Byeongseon

    () (Korea University)

Abstract

The principal objective of this study is to explore nonparametric testing for linearity in the long-run relationship of the cointegrated vector error-correction model. We develop nonparametric tests, which are predicated on general nonlinear specification, and thus nonlinear models such as the smooth transition and threshold cointegration models are contained in our specification. The test statistics can be computed using the null model of standard error correction. The asymptotic distribution of the test statistics is based on the standard distribution, and thus the proposed tests do not involve semiparametric treatment for the resolution of inferential difficulty. The alternative distribution of the test statistics is explored under the local drift and the smooth functional form. The Monte Carlo simulation shows that the proposed tests evidence adequate finite sample performance in detecting omitted nonlinearity. An economic application to the stock price-dividend relation is also provided.

Suggested Citation

  • Seo Byeongseon, 2011. "Nonparametric Testing for Linearity in Cointegrated Error-Correction Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(2), pages 1-28, March.
  • Handle: RePEc:bpj:sndecm:v:15:y:2011:i:2:n:6
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    References listed on IDEAS

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    1. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 239-253.
    2. Phillips, P.C.B., 1988. "Weak Convergence of Sample Covariance Matrices to Stochastic Integrals Via Martingale Approximations," Econometric Theory, Cambridge University Press, vol. 4(03), pages 528-533, December.
    3. Arai, Yoichi, 2016. "Testing For Linearity In Regressions With I(1) Processes," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 57(1), pages 111-138, June.
    4. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-1294, September.
    5. Bierens, Herman J, 1990. "A Consistent Conditional Moment Test of Functional Form," Econometrica, Econometric Society, vol. 58(6), pages 1443-1458, November.
    6. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-328, April.
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    Cited by:

    1. Mohammad Jaforullah & Alan King, 2015. "is New Zealand's economy vulnerable to world oil market shocks?," Working Papers 1503, University of Otago, Department of Economics, revised Mar 2015.

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