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Testing for cointegration in the presence of mis-specified structural change

  • Cook, Steven
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    The finite-sample properties of cointegration tests incorporating structural change are derived when applied to independent unit root processes subject to changes in innovation variance. It is shown that decreases in innovation variance can result in severe size distortion, with the extent of spurious rejection dependent upon which series experiences a break and when the break occurs. Mis-specified structural change is therefore shown to result in spurious regression, the very problem cointegration analysis attempts to overcome.

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    File URL: http://www.sciencedirect.com/science/article/B6V1D-4JFGCNG-3/2/51587ef6d768ee5ac405b7214f67f31d
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    Article provided by Elsevier in its journal Statistics & Probability Letters.

    Volume (Year): 76 (2006)
    Issue (Month): 13 (July)
    Pages: 1380-1384

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    Handle: RePEc:eee:stapro:v:76:y:2006:i:13:p:1380-1384
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    1. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    2. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
    3. Margaret M. McConnell & Gabriel Perez Quiros, 1997. "Output fluctuations in the United States: what has changed since the early 1980s?," Research Paper 9735, Federal Reserve Bank of New York.
    4. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March.
    5. Gregory, Allan W. & Nason, James M. & Watt, David G., 1996. "Testing for structural breaks in cointegrated relationships," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 321-341.
    6. Inclan, Carla, 1993. "Detection of Multiple Changes of Variance Using Posterior Odds," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 289-300, July.
    7. Kim, Tae-Hwan & Leybourne, Stephen & Newbold, Paul, 2002. "Unit root tests with a break in innovation variance," Journal of Econometrics, Elsevier, vol. 109(2), pages 365-387, August.
    8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    9. Hamori, Shigeyuki & Tokihisa, Akira, 1997. "Testing for a unit root in the presence of a variance shift1," Economics Letters, Elsevier, vol. 57(3), pages 245-253, December.
    10. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    11. Cook, Steven, 2003. "Size and power properties of powerful unit root tests in the presence of variance breaks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 317(3), pages 432-448.
    12. Leybourne, Stephen J. & C. Mills, Terence & Newbold, Paul, 1998. "Spurious rejections by Dickey-Fuller tests in the presence of a break under the null," Journal of Econometrics, Elsevier, vol. 87(1), pages 191-203, August.
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