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Can you do the wrong thing and still be right? Hypothesis testing in I(2) and near-I(2) cointegrated VARs

Author

Listed:
  • Francesca Di Iorio
  • Stefano Fachin
  • Riccardo Lucchetti

Abstract

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.

Suggested Citation

  • Francesca Di Iorio & Stefano Fachin & Riccardo Lucchetti, 2016. "Can you do the wrong thing and still be right? Hypothesis testing in I(2) and near-I(2) cointegrated VARs," Applied Economics, Taylor & Francis Journals, vol. 48(38), pages 3665-3678, August.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:38:p:3665-3678
    DOI: 10.1080/00036846.2016.1142660
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    Cited by:

    1. Sergej Gričar & Štefan Bojnec, 2021. "Technical Analysis of Tourism Price Process in the Eurozone," JRFM, MDPI, vol. 14(11), pages 1-25, October.
    2. Kurita, Takamitsu, 2020. "Likelihood-based tests for parameter constancy in I(2) CVAR models with an application to fixed-term deposit data," Journal of Multivariate Analysis, Elsevier, vol. 178(C).
    3. Massimo Franchi & Søren Johansen, 2017. "Improved Inference on Cointegrating Vectors in the Presence of a near Unit Root Using Adjusted Quantiles," Econometrics, MDPI, vol. 5(2), pages 1-20, June.
    4. Luke P. Jackson & Katarina Juselius & Andrew B. Martinez & Felix Pretis, 2025. "Modelling the dependence between recent changes in polar ice sheets: Implications for global sea-level projections," Working Papers 2025-002, The George Washington University, The Center for Economic Research.

    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • 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

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