Can you do the wrong thing and still be right? Hypothesis testing in I(2) and near-I(2) cointegrated VARs
In this paper, we investigate the small-sample performance of LR tests on long-run coefficients in the I (2) model; we focus on a comparison between I (2) and near- I (2) data, i.e. I (1) data with a second root very close to unity, and report the results of some Monte Carlo experiments. With near- I (2) data, the finite-sample properties of the tests are (i) similar to those found with genuine I (2) data, (ii) systematically superior to those of the analogous tests constructed in the I (1) model, even if the latter is, in principle, correctly specified and the former is not. Therefore, there seems to be strong support to the idea that, in practice, modelling near- I (2) data using the I (2) model may be a good idea, despite the inherent misspecification.
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Volume (Year): 48 (2016)
Issue (Month): 38 (August)
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