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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

    (Universit… di Napoli "Federico II")

  • Stefano FACHIN

    (Universir… La Sapienza, Roma)

  • Riccardo LUCCHETTI

    (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

Abstract

We review the I(2) model in the perspective of its application to near-I(2) data, and report the results of some Monte Carlo simulations on the small sample performance of asymptotic tests on the long-run coefficients in both I(2) and near-I(2) systems. Our findings suggest that these tests suffer from some finite-sample issues, such as size bias. However, the behaviour of these statistics is not markedly different in the I(2) and near-I(2) case at ordinary sample sizes, so the usage of the I(2) model with near-I(2) data is perfectly defensible in finite samples.

Suggested Citation

  • Francesca DI IORIO & Stefano FACHIN & Riccardo LUCCHETTI, 2013. "Can you do the wrong thing and still be right? Hypothesis Testing in I(2) and near-I(2) cointegrated VARs," Working Papers 395, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    • Handle: RePEc:anc:wpaper:395
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    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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