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The Power Of Single Equation Tests For Cointegration When The Cointegrating Vector Is Prespecified

  • Zivot, Eric
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    In this paper I present an alternative derivation of the asymptotic distribution of Kremers, Ericsson, and Dolado s (1992, Oxford Bulletin of Economics and Statistics 54, 325 348) conditional error correction model (ECM) based t-test for cointegration with a single prespecified cointegrating vector. This alternative distribution, which is identical to the distribution of Hansen s (1995, Econometric Theory 11, 1148 1171) covariate augmented t-test for a unit root, is valid for weakly exogenous regressors and depends on a consistently estimable nuisance parameter that takes on values in the unit interval. I show analytically, using asymptotic power functions based on near-cointegrated alternatives, that the ECM t-test with a prespecified cointegrating vector can have much higher power than single equation tests for cointegration based on estimating the cointegrating vector. I also characterize situations in which the ECM t-test computed with a misspecified cointegrating vector will have high power.

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    File URL: http://journals.cambridge.org/abstract_S0266466600163054
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    Article provided by Cambridge University Press in its journal Econometric Theory.

    Volume (Year): 16 (2000)
    Issue (Month): 03 (June)
    Pages: 407-439

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    Handle: RePEc:cup:etheor:v:16:y:2000:i:03:p:407-439_16
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