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Bootstrapping the likelihood ratio cointegration test in error correction models with unknown lag order

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  • Christian Kascha

    (Norges Bank (Central Bank of Norway)Author-Email:)

  • Carsten Trenkler

    () (University of Mannheim)

Abstract

We investigate the small-sample size and power properties of bootstrapped likelihood ratio systems cointegration tests via Monte Carlo simulations when the true lag order of the data generating process is unknown. A recursive bootstrap scheme is employed. We estimate the order by minimizing different information criteria. In comparison to the standard asymptotic likelihood ratio test based on an estimated lag order we found that the recursive bootstrap procedure can lead to improvements in small samples even when the true lag order is unknown while the power loss is moderate.

Suggested Citation

  • Christian Kascha & Carsten Trenkler, 2009. "Bootstrapping the likelihood ratio cointegration test in error correction models with unknown lag order," Working Paper 2009/12, Norges Bank.
  • Handle: RePEc:bno:worpap:2009_12
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2009/WP-200912/
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    Keywords

    Cointegration tests; Bootstrapping; Information criteria;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: 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

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