IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Testing for cointegration using the Johansen methodology when variables are near-integrated: size distortions and partial remedies

Listed author(s):
  • Erik Hjalmarsson

    ()

  • Pär Österholm

    ()

We investigate the properties of Johansen's (1988, 1991) maximum eigenvalue and trace tests for cointegration under the empirically relevant situation of near-integrated variables. Using Monte Carlo techniques, we show that in a system with near-integrated variables, the probability of reaching an erroneous conclusion regarding the cointegrating rank of the system is generally substantially higher than the nominal size. The risk of concluding that completely unrelated series are cointegrated is therefore non-negligible. The spurious rejection rate can be reduced by performing additional tests of restrictions on the cointegrating vector(s), although it is still substantially larger than the nominal size.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1007/s00181-009-0294-6
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 39 (2010)
Issue (Month): 1 (August)
Pages: 51-76

as
in new window

Handle: RePEc:spr:empeco:v:39:y:2010:i:1:p:51-76
DOI: 10.1007/s00181-009-0294-6
Contact details of provider: Web page: http://www.springer.com

Order Information: Web: http://www.springer.com/economics/econometrics/journal/181/PS2

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Eliane A. Cardoso, 1998. "Virtual Deficits and the Patinkin Effect," IMF Working Papers 98/41, International Monetary Fund.
  2. By May Khamis & Alfredo M. Leone, 2001. "Can Currency Demand Be Stable Under a Financial Crisis? The Case of Mexico," IMF Staff Papers, Palgrave Macmillan, vol. 48(2), pages 1-6.
  3. Syed Basher & Joakim Westerlund, 2007. "Is there really a unit root in the inflation rate? More evidence from panel data models," Applied Economics Letters, Taylor & Francis Journals, vol. 15(3), pages 161-164.
  4. Eliana Cardoso, 1998. "Virtual Deficits and the Patinkin Effect," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 619-646, December.
  5. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  6. Wright, Jonathan H, 2000. "Confidence Sets for Cointegrating Coefficients Based on Stationarity Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(2), pages 211-222, April.
  7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  8. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  9. Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-118, February.
  10. Andersson, Michael K. & Gredenhoff, Mikael P., 1999. "On the maximum likelihood cointegration procedure under a fractional equilibrium error," Economics Letters, Elsevier, vol. 65(2), pages 143-147, November.
  11. Bremnes, Helge & Gjerde, Oystein & Soettem, Frode, 2001. " Linkages among Interest Rates in the United States, Germany and Norway," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(1), pages 127-145, March.
  12. Campbell, John Y. & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Journal of Financial Economics, Elsevier, vol. 81(1), pages 27-60, July.
  13. Phillips, Peter C B, 1988. "Regression Theory for Near-Integrated Time Series," Econometrica, Econometric Society, vol. 56(5), pages 1021-1043, September.
  14. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
  15. Markku Lanne, 2001. "Near unit root and the relationship between inflation and interest rates: A reexamination of the Fisher effect," Empirical Economics, Springer, vol. 26(2), pages 357-366.
  16. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, April.
  17. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
  18. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  19. Gonzalo, Jesus & Lee, Tae-Hwy, 1998. "Pitfalls in testing for long run relationships," Journal of Econometrics, Elsevier, vol. 86(1), pages 129-154, June.
  20. Culver, Sarah E & Papell, David H, 1997. "Is There a Unit Root in the Inflation Rate? Evidence from Sequential Break and Panel Data Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(4), pages 435-444, July-Aug..
  21. Wallace, Myles S & Warner, John T, 1993. "The Fisher Effect and the Term Structure of Interest Rates: Tests of Cointegration," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 320-324, May.
  22. Song, Frank M & Wu, Yangru, 1997. "Hysteresis in Unemployment: Evidence from 48 U.S. States," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 235-243, April.
  23. Junttila, Juha, 2001. "Testing an Augmented Fisher Hypothesis for a Small Open Economy: The Case of Finland," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 577-599, October.
  24. Debabrata Bagchi & Georgios E. Chortareas & Stephen M. Miller, 2004. "The Real Exchange Rate in Small, Open, Developed Economies: Evidence from Cointegration Analysis," The Economic Record, The Economic Society of Australia, vol. 80(248), pages 76-88, 03.
  25. By Gunnar Jonsson, 2001. "Inflation, Money Demand, and Purchasing Power Parity in South Africa," IMF Staff Papers, Palgrave Macmillan, vol. 48(2), pages 1-2.
  26. Lee, Hsiu-Yun & Wu, Jyh-Lin, 2001. "Mean Reversion of Inflation Rates: Evidence from 13 OECD Countries," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 477-487, July.
  27. Markku Lanne, 2000. "Near unit roots, cointegration, and the term structure of interest rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 513-529.
  28. Brigitte Granville & Sushanta Mallick, 2004. "Fisher hypothesis: UK evidence over a century," Applied Economics Letters, Taylor & Francis Journals, vol. 11(2), pages 87-90.
  29. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
  30. Aaron Smallwood & Stefan Norrbin, 2004. "Estimating cointegrating vectors using near unit root variables," Applied Economics Letters, Taylor & Francis Journals, vol. 11(12), pages 781-784.
  31. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  32. Par Osterholm, 2004. "Killing four unit root birds in the US economy with three panel unit root test stones," Applied Economics Letters, Taylor & Francis Journals, vol. 11(4), pages 213-216.
  33. Song, Frank M. & Wu, Yangru, 1998. "Hysteresis in unemployment: Evidence from OECD countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(2), pages 181-192.
  34. Wu, Jhy-Lin & Chen, Show-Lin, 2001. " Mean Reversion of Interest Rates in the Eurocurrency Market," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(4), pages 459-473, September.
  35. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1131-1147, October.
  36. Graham Elliott, 1998. "On the Robustness of Cointegration Methods when Regressors Almost Have Unit Roots," Econometrica, Econometric Society, vol. 66(1), pages 149-158, January.
  37. Wu, Yangru & Zhang, Hua, 1996. "Mean Reversion in Interest Rates: New Evidence from a Panel of OECD Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 604-621, November.
  38. repec:cup:etheor:v:11:y:1995:i:5:p:1131-47 is not listed on IDEAS
  39. Malley, James R & Moutos, Thomas, 1996. "Unemployment and Consumption," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 584-600, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:39:y:2010:i:1:p:51-76. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

or (Rebekah McClure)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.