Cointegration Analysis in the Presence of Outliers
The effects of innovational outliers and additive outliers in cointegrated vector autoregressions are examined and it is analyzed how outliers can be modelled with dummy variables. Using a Monte Carlo simulation it is illustrated how misspecified dummies may distort inference on the cointegration rank in finite samples. That questions the common practice in applied cointegration analyses of including unrestricted dummy variables to account for large residuals. Instead it is suggested to test the adequacy of a particular specification of dummies prior to determining the cointegration rank. The points are illustrated on a UK money demand data set
|Date of creation:||Mar 2003|
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