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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- Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000.
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- Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
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