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A Monte Carlo Study on the Pitfalls in Determining Deterministic Components in Cointegrating Models

  • Hjelm, Göran


    (Department of Economics, Lund University)

  • Johansson, Martin W


    (Department of Economics, Lund University)

Registered author(s):

    In this paper we examine, by means of Monte Carlo simulation, the properties of the so called 'Pantula principle' for the simultaneous determination of rank and deterministic components in a vector error correction model. Examining the five models contained within the Johansen methodology, we find that the 'Pantula principle' is heavily biased towards choosing model 3 (unrestriced constant) when model 4 (restricted trend) is the true one. We suggest a modification that reduces this bias to an important extent

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    Paper provided by Lund University, Department of Economics in its series Working Papers with number 2002:3.

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    Length: 13 pages
    Date of creation: 05 Feb 2002
    Date of revision:
    Publication status: Published in Journal of Macroeconomics, 2005, pages 691-703.
    Handle: RePEc:hhs:lunewp:2002_003
    Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
    Phone: +46 +46 222 0000
    Fax: +46 +46 2224613
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    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    2. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
    3. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
    4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, July.
    5. Jurgen A. Doornik & David F. Hendry & Bent Nielsen, 1998. "Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 533-572, December.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    7. Anders Rahbek & Rocco Mosconi, 1999. "Cointegration rank inference with stationary regressors in VAR models," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 76-91.
    8. Nielsen, Bent & Rahbek, Anders, 2000. " Similarity Issues in Cointegration Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(1), pages 5-22, February.
    9. Jurgen A. Doornik & H. Peter Boswijk, 2005. "Distribution approximations for cointegration tests with stationary exogenous regressors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(6), pages 797-810.
    10. Pantula, Sastry G., 1989. "Testing for Unit Roots in Time Series Data," Econometric Theory, Cambridge University Press, vol. 5(02), pages 256-271, August.
    11. Hatemi-J, Abdulnasser, 2002. "Fiscal policy in Sweden: effects of EMU criteria convergence," Economic Modelling, Elsevier, vol. 19(1), pages 121-136, January.
    12. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
    13. Zhou, Su, 2000. "Testing Structural Hypotheses on Cointegration Relations with Small Samples," Economic Inquiry, Western Economic Association International, vol. 38(4), pages 629-40, October.
    14. Haug, A.A., 1992. "Tests for Cointegration: A Monte Carlo Comparison," Papers 93-2, York (Canada) - Department of Economics.
    15. Johansen, Soren, 1992. "Determination of Cointegration Rank in the Presence of a Linear Trend," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 383-97, August.
    16. Gredenhoff, Mikael & Jacobson, Tor, 2001. "Bootstrap Testing Linear Restrictions on Cointegrating Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 63-72, January.
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