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Testing Structural Hypotheses on Cointegration Vectors: A Monte Carlo Study

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    In this paper, two tests for structural hypotheses on cointegration vectors are evaluated in a Monte Carlo study. The tests are the likelihood ratio test proposed by Johansen (1991) and the test for stationarity proposed by Kwiatkowski et al (1992). The analysis of the likelihood ratio test is extended with the inclusion of a Bartlett correction factor. Under circumstances common in empirical applications, all tests suffer from large size distortions and have low power to detect a false cointegration vector, but the Johansen (1991) test fares slightly better than the Kwiatkowski et al (1992) test. Applying a Bartlett correction factor in small samples improves to a large extent the likelihood ratio test.

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    File URL: http://project.nek.lu.se/publications/workpap/Papers/WP04_29.pdf
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    Paper provided by Lund University, Department of Economics in its series Working Papers with number 2004:29.

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    Length: 31 pages
    Date of creation: 17 Dec 2004
    Date of revision:
    Handle: RePEc:hhs:lunewp:2004_029
    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
    Web page: http://www.nek.lu.se/en

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    1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    2. 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.
    3. Omtzigt Pieter & Fachin Stefano, 2002. "Bootstrapping and Bartlett corrections in the cointegrated VAR model," Economics and Quantitative Methods qf0212, Department of Economics, University of Insubria.
    4. Fachin, Stefano, 2000. " Bootstrap and Asymptotic Tests of Long-Run Relationships in Cointegrated Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(4), pages 543-51, September.
    5. Robert A. Amano & Simon van Norden, 1995. "Unit Root Tests and the Burden of Proof," Econometrics 9502005, EconWPA.
    6. Johansen, S., 1999. "A Bartlett Correction Factor for Tests on the Cointegrating Relations," Economics Working Papers eco99/10, European University Institute.
    7. Anindya Banerjee & Lynne Cockerell & Bill Russell, 2000. "An I(2) Analysis of Inflation and the Markup," Dundee Discussion Papers in Economics 120, Economic Studies, University of Dundee.
    8. Haug, Alfred A., 2002. "Testing Linear Restrictions On Cointegrating Vectors: Sizes And Powers Of Wald And Likelihood Ratio Tests In Finite Samples," Econometric Theory, Cambridge University Press, vol. 18(02), pages 505-524, April.
    9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    11. 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.
    12. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    13. Tor Jacobson, 1995. "Simulating small-sample properties of the maximum likelihood cointegration method : estimation and testing," Finnish Economic Papers, Finnish Economic Association, vol. 8(2), pages 96-107, Autumn.
    14. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    15. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
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