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A Comparison Between Tests For Changes In The Adjustment Coefficients In Cointegrated Systems

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  • Marco R. Barassi
  • Guglielmo Maria Caporale

    ()

  • Stephen G. Hall

Abstract

In this paper we examine several approaches to detecting changes in the djustment coefficients in cointegrated VARs. We adopt recursive and rolling techniques as mis-specification tests for the detection of non-constancy and the estimation of the breakpoints. We find that inspection of the recursive eigenvalues is not useful to detect a break in the adjustment coefficients, whilst recursive estimation of the coefficients can only indicate non-constancy, but not the exact breakpoint. Rolling estimation is found to perform better in detecting non-constancy in the parameters and their true value after the breakpoint. However, it only detects a region where the break is likely to occur. To overcome the drawbacks of these techniques, we use an OLS-based sequential test. To assess its performance, we derive its critical values for different sample sizes. Monte Carlo evidence shows that the test has reasonably good power even in moderately sized samples and that it can be used as a graphical device, as it shows a kink at the breakpoint. As a benchmark we use the Kalman filter, of which we analyse the performance on the same data generating processes (DGP).

Suggested Citation

  • Marco R. Barassi & Guglielmo Maria Caporale & Stephen G. Hall, 2006. "A Comparison Between Tests For Changes In The Adjustment Coefficients In Cointegrated Systems," Economics and Finance Discussion Papers 06-04, Economics and Finance Section, School of Social Sciences, Brunel University.
  • Handle: RePEc:bru:bruedp:06-04
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    File URL: http://www.brunel.ac.uk/329/efwps/0604.pdf
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    Cited by:

    1. Garcés Díaz Daniel, 2017. "Explaining Inflation with a Classical Dichotomy Model and Switching Monetary Regimes: Mexico 1932-2013," Working Papers 2017-20, Banco de México.
    2. Garcés Díaz Daniel, 2016. "Changes in Inflation Predictability in Major Latin American Countries," Working Papers 2016-20, Banco de México.

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