Simulating competing cointegration tests in a bivariate system
In this paper, we consider the size and power of a set of cointegration tests in a number of Monte Carlo simulations. The behaviour of the competing methods is investigated in diff erent situations, including diff erent levels of variance and correlation in the error processes. The impact of violations of the common factor restriction (CFR) implied by the Engle-Granger framework is studied in these situations. The reactions to changes in the CFR condition depend on the error correlation. When the correlation is non-positive, the power increases with increasing CFR violations for the error correction model (ECM) test, while the other tests react in the opposite direction. We also note the reaction to diff erences in the error variances in the data-generating process. For positive correlation and equal variances, the reaction to changes in the CFR violations diff ers somewhat between the tests. We conclude that the ECM and the Z-tests show the best performance over diff erent parameter combinations. In most situations the ECM is best. Therefore, if we had to recommend a unit root test, it would be the ECM, especially for small samples. However, we do not think that one should use just one test, but two or more. Of course, the portfolio of tests we have considered here only represents a subset of the possible tests.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 26 (1999)
Issue (Month): 7 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/CJAS20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/CJAS20|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Haug, A.A., 1992.
"Tests for Cointegration: A Monte Carlo Comparison,"
93-2, York (Canada) - Department of Economics.
- N/A, 1991. "Appraisal," National Institute Economic Review, National Institute of Economic and Social Research, vol. 138(1), pages 3-5, November.
- James G. MacKinnon, 2010.
"Critical Values for Cointegration Tests,"
1227, Queen's University, Department of Economics.
- Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992.
"The Power of Cointegration Tests,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
- Phillips, Peter C B & Ouliaris, S, 1990.
"Asymptotic Properties of Residual Based Tests for Cointegration,"
Econometric Society, vol. 58(1), pages 165-93, January.
- Tom Doan, . "POTESTRESIDS: RATS procedure to perform Phillips-Ouliaris-Hansen test for Cointegration on 1st stage residuals," Statistical Software Components RTS00248, Boston College Department of Economics.
- Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
- Tom Doan, . "POTEST: RATS procedure to perform Phillips-Ouliaris-Hansen test for Cointegration," Statistical Software Components RTS00247, Boston College Department of Economics.
- Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
- Engle, Robert F & Granger, Clive W J, 1987.
"Co-integration and Error Correction: Representation, Estimation, and Testing,"
Econometric Society, vol. 55(2), pages 251-76, March.
- Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- James H. Stock & Mark W. Watson, 1991.
"A simple estimator of cointegrating vectors in higher order integrated systems,"
Working Paper Series, Macroeconomic Issues
91-3, Federal Reserve Bank of Chicago.
- Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
- Hendry, David F & Ericsson, Neil R, 1991. "An Econometric Analysis of U.K. Money Demand in 'Monetary Trends in the United States and the United Kingdom' by Milton Friedman and Anna Schwartz," American Economic Review, American Economic Association, vol. 81(1), pages 8-38, March.
- Hansen, Bruce E, 2002.
"Tests for Parameter Instability in Regressions with I(1) Processes,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(1), pages 45-59, January.
- Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Peter C.B. Phillips, 1985.
"Time Series Regression with a Unit Root,"
Cowles Foundation Discussion Papers
740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
- Andrews, Donald W K, 1991.
"Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation,"
Econometric Society, vol. 59(3), pages 817-58, May.
- Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
- Kiviet, Jan F & Phillips, Garry D A, 1992. "Exact Similar Tests for Unit Roots and Cointegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 349-67, August.
When requesting a correction, please mention this item's handle: RePEc:taf:japsta:v:26:y:1999:i:7:p:831-846. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.