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A model selection approach to jointly testing for structural breaks and cointegration with application to the Eurocurrency interest rates market

Author

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  • Yan Qian

    (Suzhou University of Science and Technology)

  • Zijun Wang

    (University of Texas at San Antonio)

Abstract

All tests involving both structural breaks and cointegration are parametric. As a complement to the classical hypothesis testing for empirical researchers, we suggest the use of a one-step model selection approach to simultaneously specifying lag orders, cointegration ranks, and structural breaks. The performances of the four popular information criteria along with a LM-based parametric test are shown in extensive simulation studies. Applying the approach to study linkages in the Eurocurrency interest rates market, we find that six major short-term rates were subject to a structural break and the cointegration rank also changed following the break.

Suggested Citation

  • Yan Qian & Zijun Wang, 2021. "A model selection approach to jointly testing for structural breaks and cointegration with application to the Eurocurrency interest rates market," Empirical Economics, Springer, vol. 61(2), pages 799-825, August.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:2:d:10.1007_s00181-020-01916-1
    DOI: 10.1007/s00181-020-01916-1
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    More about this item

    Keywords

    Model selection; Structural break; Cointegration; Eurocurrency interest rates;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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