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Additional results on the power of unit root and cointegration tests under threshold processes

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  • Michael Pippenger
  • Gregory Goering

Abstract

Recently researchers have begun to develop methods to detect stationarity or cointegration when the underlying error correction process follows a threshold model. In the context of one type of threshold model, Pippenger and Goering found that the power of unit root or cointegration tests decay substantially under many economically relevant parameterization. However, in a recent article Balke and Fomby conclude that linear tests work 'reasonably well when threshold cointegration is present' and based on these findings propose a modelling methodology under threshold cointegration. This study examines the threshold processes they analysed under a wide range of parameterizations and finds that linear unit root and cointegration tests display relatively low power even under large sample sizes. Hence, contrary to Balke and Fomby linear cointegration tests appear to be an inappropriate test under threshold cointegration.

Suggested Citation

  • Michael Pippenger & Gregory Goering, 2000. "Additional results on the power of unit root and cointegration tests under threshold processes," Applied Economics Letters, Taylor & Francis Journals, vol. 7(10), pages 641-644.
  • Handle: RePEc:taf:apeclt:v:7:y:2000:i:10:p:641-644
    DOI: 10.1080/135048500415932
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    References listed on IDEAS

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    1. Baldwin, Richard, 1990. "Re-Interpreting the Failure of Foreign Exchange Market Efficiency Tests: Small Transaction Costs, Big Hysteresis Bands," CEPR Discussion Papers 407, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
    2. Nikolaou, Kleopatra, 2008. "The behaviour of the real exchange rate: Evidence from regression quantiles," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 664-679, May.
    3. Frédérique Bec & Mélika Ben Salem & Ronald MacDonald, 2006. "Real exchange rates and real interest rates : a nonlinear perspective," Recherches économiques de Louvain, De Boeck Université, vol. 72(2), pages 177-194.
    4. Frederic Bec & Melika Ben Salem & Marine Carrasco, 2004. "Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 382-395, October.
    5. Michael Funke & Jörg Rahn, 2005. "Just How Undervalued is the Chinese Renminbi?," The World Economy, Wiley Blackwell, vol. 28(4), pages 465-489, April.
    6. Frédérique Bec & Mélika Ben Salem & Marine Carrasco, 2010. "Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime star Model," Annals of Economics and Statistics, GENES, issue 99-100, pages 395-427.
    7. Michael Funke & Jorg Rahn, 2004. "By How Much Is The Chinese Renminbi Undervalued?," Money Macro and Finance (MMF) Research Group Conference 2004 40, Money Macro and Finance Research Group.
    8. Nikolaou, Kleopatra, 2006. "The behaviour of the real exchange rate: evidence from regression quantiles," Working Paper Series 667, European Central Bank.
    9. Seo, Myunghwan, 2006. "Bootstrap testing for the null of no cointegration in a threshold vector error correction model," Journal of Econometrics, Elsevier, vol. 134(1), pages 129-150, September.
    10. Luisa Nieto & Mª Dolores Robles Fernández & Ángeles Fernández, 2002. "Linear and Nonlinear Intraday Dynamics between the Eurostoxx-50," Documentos de Trabajo del ICAE 0208, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    11. Kleopatra Nikolaou, 2007. "The behaviour of the real exchange rate: Evidence from regression quantiles," Money Macro and Finance (MMF) Research Group Conference 2006 46, Money Macro and Finance Research Group.
    12. Woo, Kai-Yin & Lee, Shu-Kam & Chan, Alan, 2014. "Non-linear adjustments to intranational PPP," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 360-371.
    13. Joanna Bruzda, 2008. "Output-Capital Nexus in the Solow and Romer Growth Models. LSTR or ESTR Cointegration?," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 8, pages 103-110.
    14. Loy, Jens-Peter & Holm, Thore & Steinhagen, Carsten, 2012. "Vertical Price Transmission In Differentiated Product Markets: A Disaggregated Study For Milk And Butter," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 123284, Agricultural and Applied Economics Association.
    15. Jing Li & Junsoo Lee, 2010. "ADL tests for threshold cointegration," Journal of Time Series Analysis, Wiley Blackwell, vol. 31(4), pages 241-254, July.
    16. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.
    17. Chevallier, Julien, 2011. "Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models," Economic Modelling, Elsevier, vol. 28(6), pages 2634-2656.
    18. Schweikert, Karsten, 2018. "Testing for cointegration with threshold adjustment in the presence of structural breaks," Hohenheim Discussion Papers in Business, Economics and Social Sciences 07-2018, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    19. Jeon, Bang Nam & Seo, Byeongseon, 2003. "The impact of the Asian financial crisis on foreign exchange market efficiency: The case of East Asian countries," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 509-525, September.

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