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Single-equation tests for Cointegration with GLS Detrended Data

Author

Listed:
  • Gabriel Rodriguez

    (Pontificia Universidad Catolica del Peru)

  • Pierre Perron

    (Boston University)

Abstract

We provide GLS-based versions of two widely used approaches for testing whether or not non-stationary economic time series are cointegrated: single-equation static re- gression or residual-based tests and single-equation conditional error correction model (ECM) based tests. Our approach is to consider nearly optimal tests for unit roots and apply them in the cointegration context. Our GLS versions of the tests do in- deed provide substantial improvements over their OLS counterparts. We derive the local asymptotic power functions of all tests considered for a DGP with weakly ex- ogenous regressors. This allows obtaining the relevant non-centrality parameter to quasi-di§erence the data. We investigate the e§ect of non-weakly exogenous regressors via simulations. With weakly exogenous regressors strongly correlated with the depen- dent variable, the ECM tests are clearly superior. When the regressors are potentially non-weakly exogenous, the residuals-based tests are clearly preferred.

Suggested Citation

  • Gabriel Rodriguez & Pierre Perron, 2013. "Single-equation tests for Cointegration with GLS Detrended Data," Boston University - Department of Economics - Working Papers Series 2013-016, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2013-016
    as

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    File URL: http://www.bu.edu/econ/files/2014/05/Perron-Single-Equation-Test-for-Cointegration-Sept-2013.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
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