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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

  • 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)

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.

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File URL: http://docs.dises.univpm.it/web/quaderni/pdf/395.pdf
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Paper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 395.

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Length: 20
Date of creation: Nov 2013
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Handle: RePEc:anc:wpaper:395
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  1. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  2. Paruolo, Paolo & Rahbek, Anders, 1999. "Weak exogeneity in I(2) VAR systems," Journal of Econometrics, Elsevier, vol. 93(2), pages 281-308, December.
  3. Heino Bohn Nielsen & Christopher Bowdler, 2003. "Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices," Economics Papers 2003-W05, Economics Group, Nuffield College, University of Oxford.
  4. Hans Christian Kongsted, 2003. "An I(2) cointegration analysis of small-country import price determination," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 53-71, 06.
  5. Johansen, Søren & Juselius, Katarina & Frydman, Roman & Goldberg, Michael, 2010. "Testing hypotheses in an I(2) model with piecewise linear trends. An analysis of the persistent long swings in the Dmk/$ rate," Journal of Econometrics, Elsevier, vol. 158(1), pages 117-129, September.
  6. Takamitsu Kurita & Heino Bohn Nielsen & Anders Rahbek, 2011. "An I(2) cointegration model with piecewise linear trends," Econometrics Journal, Royal Economic Society, vol. 14(2), pages 131-155, 07.
  7. Luca Fanelli & Emanuele Bacchiocchi, 2005. "Testing the purchasing power parity through I(2) cointegration techniques," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(6), pages 749-770.
  8. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
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