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New Improved Tests for Cointegration with Structural Breaks

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This paper proposes Lagrange multiplier based tests for the null hypothesis of no cointegration. The tests are general enough to allow for heteroskedastic and serially correlated errors, deterministic trends, and a structural break of unknown timing in both the intercept and slope. The limiting distributions of the test statistics are derived, and are found to be invariant not only with respect to trend and structural break, but also with respect to the regressors. A small Monte Carlo study is also con- ducted to investigate the small-sample properties of the tests. The results reveal that the tests have small size distortions and good power relative to other tests.

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  • Westerlund, Joakim & Edgerton , David, 2006. "New Improved Tests for Cointegration with Structural Breaks," Working Papers 2006:3, Lund University, Department of Economics.
  • Handle: RePEc:hhs:lunewp:2006_003
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    11. 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.
    12. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    13. Busetti, Fabio & Harvey, Andrew, 2008. "Testing For Trend," Econometric Theory, Cambridge University Press, vol. 24(01), pages 72-87, February.
    14. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    15. Josep Lluís Carrion-i-Silvestre & Andreu Sansó, 2006. "Testing the Null of Cointegration with Structural Breaks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(5), pages 623-646, October.
    16. Schmidt, Peter & Phillips, C B Peter, 1992. "LM Tests for a Unit Root in the Presence of Deterministic Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 257-287, August.
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    Citations

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    Cited by:

    1. Matteo Mogliani, 2010. "Residual-based tests for cointegration and multiple deterministic structural breaks: A Monte Carlo study," PSE Working Papers halshs-00564897, HAL.
    2. Maki, Daiki, 2012. "Tests for cointegration allowing for an unknown number of breaks," Economic Modelling, Elsevier, vol. 29(5), pages 2011-2015.
    3. Westerlund, J., 2006. "Panel cointegration tests of the Fisher effect," Research Memorandum 054, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    4. Konrad Adler & Christian Grisse, 2017. "Thousands of BEERs: Take your pick," Review of International Economics, Wiley Blackwell, vol. 25(5), pages 1078-1104, November.
    5. Joakim Westerlund, 2013. "A computationally convenient unit root test with covariates, conditional heteroskedasticity and efficient detrending," Journal of Time Series Analysis, Wiley Blackwell, vol. 34(4), pages 477-495, July.
    6. Westerlund, Joakim, 2013. "Simple unit root testing in generally trending data with an application to precious metal prices in Asia," Journal of Asian Economics, Elsevier, vol. 28(C), pages 12-27.
    7. Richard Crump & Gopi Shah Goda & Kevin J. Mumford, 2011. "Fertility and the Personal Exemption: Comment," American Economic Review, American Economic Association, vol. 101(4), pages 1616-1628, June.
    8. Westerlund, Joakim, 2009. "Testing for Unit Roots in Panel Time Series Models with Multiple Breaks," Working Papers in Economics 384, University of Gothenburg, Department of Economics.
    9. Razak, Lutfi Abdul & Masih, Mansur, 2017. "Revisit Feldstein-Horioka puzzle: evidence from Malaysia (1960-2015)," MPRA Paper 79407, University Library of Munich, Germany.
    10. Joakim Westerlund & David L. Edgerton, 2008. "A Simple Test for Cointegration in Dependent Panels with Structural Breaks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(5), pages 665-704, October.
    11. Westerlund, Joakim & Edgerton, David, 2006. "Simple Tests for Cointegration in Dependent Panels with Structural Breaks," Working Papers 2006:13, Lund University, Department of Economics, revised 28 Jan 2007.
    12. Wang, Weiguo & Xue, Jing & Du, Chonghua, 2016. "The Balassa–Samuelson hypothesis in the developed and developing countries revisited," Economics Letters, Elsevier, vol. 146(C), pages 33-38.
    13. Hamit-Haggar, Mahamat, 2016. "Clean energy-growth nexus in sub-Saharan Africa: Evidence from cross-sectionally dependent heterogeneous panel with structural breaks," Renewable and Sustainable Energy Reviews, Elsevier, vol. 57(C), pages 1237-1244.
    14. Katircioğlu, Salih Turan, 2014. "Testing the tourism-induced EKC hypothesis: The case of Singapore," Economic Modelling, Elsevier, vol. 41(C), pages 383-391.
    15. El-Shazly, Alaa, 2016. "Structural breaks and monetary dynamics: A time series analysis," Economic Modelling, Elsevier, vol. 53(C), pages 133-143.
    16. Joakim Westerlund & Paresh Narayan, 2013. "Testing the Efficient Market Hypothesis in Conditionally Heteroskedastic Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(11), pages 1024-1045, November.
    17. Bilgili, Faik & Koçak, Emrah & Bulut, Ümit & Sualp, M. Nedim, 2016. "How did the US economy react to shale gas production revolution? An advanced time series approach," Energy, Elsevier, vol. 116(P1), pages 963-977.
    18. Cortes, Maria, 2007. "Examining Patterns of Bilateral Trade between Australia and Colombia by Using Cointegration Analysis and Error-Correction Models," Economics Working Papers wp07-20, School of Economics, University of Wollongong, NSW, Australia.
    19. Matteo Mogliani, 2010. "Residual-based tests for cointegration and multiple deterministic structural breaks: A Monte Carlo study," Working Papers halshs-00564897, HAL.
    20. Yasemin Barlas Ozer & Kam-Ki Tang, "undated". "An Empirical Analysis of Financial and Housing Wealth Effects on Consumption in Turkey," MRG Discussion Paper Series 2809, School of Economics, University of Queensland, Australia.
    21. repec:eee:ecmode:v:67:y:2017:i:c:p:114-124 is not listed on IDEAS
    22. repec:spr:empeco:v:53:y:2017:i:3:d:10.1007_s00181-016-1156-7 is not listed on IDEAS
    23. Joakim Westerlund, 2008. "Panel cointegration tests of the Fisher effect," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 193-233.
    24. Westerlund, Joakim, 2015. "The effect of recursive detrending on panel unit root tests," Journal of Econometrics, Elsevier, vol. 185(2), pages 453-467.

    More about this item

    Keywords

    Cointegration Test; Lagrange Multiplier Principle; Structural Break; Deterministic Trend.;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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