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A residual-based cointegration test for near unit root variables

Listed author(s):
  • Erik Hjalmarsson
  • Par Osterholm

Methods of inference based on a unit root assumption in the data are typically not robust to even small deviations from this assumption. In this paper, we propose robust procedures for a residual-based test of cointegration when the data are generated by a near unit root process. A Bonferroni method is used to address the uncertainty regarding the exact degree of persistence in the process. We thus provide a method for valid inference in multivariate near unit root processes where standard cointegration tests may be subject to substantial size distortions and standard OLS inference may lead to spurious results. Empirical illustrations are given by: (i) a re-examination of the Fisher hypothesis, and (ii) a test of the validity of the cointegrating relationship between aggregate consumption, asset holdings, and labor income, which has attracted a great deal of attention in the recent finance literature.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 907.

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Date of creation: 2007
Handle: RePEc:fip:fedgif:907
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  1. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1131-1147, October.
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  4. Pär Österholm & Erik Hjalmarsson, 2007. "Testing for Cointegration Using the Johansen Methodology when Variables are Near-Integrated," IMF Working Papers 07/141, International Monetary Fund.
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  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. Peter C.B. Phillips, 1986. "Regression Theory for Near-Integrated Time Series," Cowles Foundation Discussion Papers 781R, Cowles Foundation for Research in Economics, Yale University, revised Jan 1987.
  9. Frederic S. Mishkin, 1991. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc.
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  13. Culver, Sarah E & Papell, David H, 1997. "Is There a Unit Root in the Inflation Rate? Evidence from Sequential Break and Panel Data Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(4), pages 435-444, July-Aug..
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