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Monitoring cointegration in systems of cointegrating relationships

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  • Theising, Etienne
  • Wied, Dominik

Abstract

Monitoring statistics for structural changes in systems of cointegrating relationships are proposed. The approach is based on parameter estimation over a calibration period. In case of homogenous systems and cross-sectional independence the pooled fully modified OLS estimator takes into account the effects of error serial correlation and regressor endogeneity. Cross-sectional dependence is allowed by using the pooled fully modified GLS estimator for homogenous systems and the fully modified SUR estimator for inhomogenous systems. The detectors show decent behaviour under the null hypothesis with controlled rejection probabilities and power against two alternatives for different data generating processes. An empirical application investigates deviations from the arbitrage parity condition for exchange rate triplets including Bitcoin. The procedures detect breakpoints in May to August 2014 and in January to May 2015 indicating an instability in arbitrage parities. Following this, a promising portfolio trading strategy based on the breakdates is constructed.

Suggested Citation

  • Theising, Etienne & Wied, Dominik, 2026. "Monitoring cointegration in systems of cointegrating relationships," Econometrics and Statistics, Elsevier, vol. 37(C), pages 61-86.
    • Handle: RePEc:eee:ecosta:v:37:y:2026:i:c:p:61-86
    DOI: 10.1016/j.ecosta.2023.01.001
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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