Testing for cointegration using the Johansen approach: Are we using the correct critical values?
This paper presents Monte Carlo simulations for the Johansen cointegration test which indicate that the critical values applied in a number of econometrics software packages are inappropriate. This is due to a confusion in the specification of the deterministic terms included in the VECM between the cases considered by Osterwald-Lenum (1992) and Pesaran, Shin and Smith (2000). The result is a tendency to reject the null of no cointegration too often. However, a simple adjustment of the critical values is enough to deal with the problem.
|Date of creation:||May 2007|
|Date of revision:||May 2007|
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ESE Discussion Papers
38, Edinburgh School of Economics, University of Edinburgh.
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- James G. MacKinnon & Alfred A. Haug & Leo Michelis, 1996.
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1996_07, York University, Department of Economics.
- MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
- Mackinnon, J.G. & Haug, A.A. & Michelis, L., 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," G.R.E.Q.A.M. 96a09, Universite Aix-Marseille III.
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