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Bootstrap Cointegration Rank Testing: The Role of Deterministic Variables and Initial Values in the Bootstrap Recursion

Author

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  • Giuseppe Cavaliere
  • A. M. Robert Taylor
  • Carsten Trenkler

Abstract

In this paper we investigate the role of deterministic components and initial values in bootstrap likelihood ratio type tests of cointegration rank. A number of bootstrap procedures have been proposed in the recent literature some of which include estimated deterministic components and nonzero initial values in the bootstrap recursion while others do the opposite. To date, however, there has not been a study into the relative performance of these two alternative approaches. In this paper we fill this gap in the literature and consider the impact of these choices on both ordinary least squares (OLS) and generalized least squares (GLS) detrended tests, in the case of the latter proposing a new bootstrap algorithm as part of our analysis. Overall, for OLS detrended tests our findings suggest that it is preferable to take the computationally simpler approach of not including estimated deterministic components in the bootstrap recursion and setting the initial values of the bootstrap recursion to zero. For GLS detrended tests, we find that the approach of Trenkler (2009), who includes a restricted estimate of the deterministic component in the bootstrap recursion, can improve finite sample behavior further.

Suggested Citation

  • Giuseppe Cavaliere & A. M. Robert Taylor & Carsten Trenkler, 2013. "Bootstrap Cointegration Rank Testing: The Role of Deterministic Variables and Initial Values in the Bootstrap Recursion," Econometric Reviews, Taylor & Francis Journals, vol. 32(7), pages 814-847, October.
    • Handle: RePEc:taf:emetrv:v:32:y:2013:i:7:p:814-847
    DOI: 10.1080/07474938.2012.690677
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    Cited by:

    1. Hutter, Christian & Klinger, Sabine & Trenkler, Carsten & Weber, Enzo, 2019. "Which factors are behind Germany's labour market upswing?," IAB-Discussion Paper 201920, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    2. Guillaume Chevillon, 2017. "Robust cointegration testing in the presence of weak trends, with an application to the human origin of global warming," Econometric Reviews, Taylor & Francis Journals, vol. 36(5), pages 514-545, May.
    3. Giuseppe Cavaliere & A. M. Robert Taylor & Carsten Trenkler, 2015. "Bootstrap Co-integration Rank Testing: The Effect of Bias-Correcting Parameter Estimates," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(5), pages 740-759, October.
    4. Marçal, Emerson Fernandes & Simões, Oscar Rodrigues, 2024. "Current account and real effective exchange rate dynamics: the role of non-linear dynamics in Brazil," Textos para discussão 571, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    5. Cavaliere, Giuseppe & Rahbek, Anders & Taylor, Robert, 2010. "Determination of the Number of Common Stochastic Trends Under Conditional Heteroskedasticity/Determinación del número de tendencias estocásticas comunes bajo heteroscedasticidad condicional," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 28, pages 519-552, Diciembre.
    6. repec:hal:journl:hal-00914830 is not listed on IDEAS
    7. Giuseppe Cavaliere & Dimitris N. Politis & Anders Rahbek & Giuseppe Cavaliere & Dimitris N. Politis & Anders Rahbek, 2015. "Recent developments in bootstrap methods for dependent data," Journal of Time Series Analysis, Wiley Blackwell, vol. 36(3), pages 269-271, May.

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