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Residuals-based Tests for Cointegration with GLS Detrended Data

Listed author(s):
  • Pierre Perron

    ()

    (Boston University)

  • Gabriel Rodríguez

    ()

    (Pontificia Universidad Católica del Perú)

We provide GLS-detrended versions of single-equation static regression or residuals-based tests for testing whether or not non-stationary time series are cointegrated. Our approach is to consider nearly optimal tests for unit roots and apply them in the cointegration context. We derive the local asymptotic power functions of all tests considered for a triangular DGP imposing a directional restriction such that the regressors are pure integrated processes. Our GLS versions of the tests do indeed provide substantial power improvements over their OLS counterparts. Simulations show that the gains in power are important and stable across various configurations.

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File URL: http://people.bu.edu/perron/papers/coint-gls.pdf
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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2015-017.

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Date of revision: 19 Oct 2015
Handle: RePEc:bos:wpaper:wp2015-017
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