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The Properties of Cointegration Tests in Models with Structural Change

  • Vasco J. Gabriel


    (Universidade do Minho - NIPE
    Birkbeck College, University of London)

  • Luis F. Martins


    (Instituto Superior de Ciências do Trabalho e da Empresa, UNIDE)

In this paper we examine, by means of Monte Carlo simulation, the properties of several cointegration tests when long run parameters are subject to structural changes. We allow for different types of stochastic and deterministic regime shifts, more specifically, changes governed by Markov chains, martingale parameter variation, sudden multiple breaks and gradual changes. Our Monte Carlo analysis reveals that tests with cointegration as the null hypothesis perform badly, while tests with the null of no cointegration retain much of their usefulness in this context.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 1/2000.

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Date of creation: 2000
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Handle: RePEc:nip:nipewp:1/2000
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Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal

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  1. Andrews, Donald W K & Monahan, J Christopher, 1992. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Econometrica, Econometric Society, vol. 60(4), pages 953-66, July.
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  3. Julia Campos & Neil R. Ericsson & David F. Hendry, 1993. "Cointegration tests in the presence of structural breaks," International Finance Discussion Papers 440, Board of Governors of the Federal Reserve System (U.S.).
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  7. Gregory, Allan W. & Nason, James M. & Watt, David G., 1996. "Testing for structural breaks in cointegrated relationships," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 321-341.
  8. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
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  11. Hendry, David F., 2000. "On detectable and non-detectable structural change," Structural Change and Economic Dynamics, Elsevier, vol. 11(1-2), pages 45-65, July.
  12. Hao, K., 1996. "Testing for Structural Change in Cointegrated Regression Models: Some Comparisons and Generalizations," Monash Econometrics and Business Statistics Working Papers 3/96, Monash University, Department of Econometrics and Business Statistics.
  13. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
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  15. Hans-Martin Krolzig, 1999. "Statistical Analysis of Cointegrated VAR Processes with Markovian Regime Shifts," Computing in Economics and Finance 1999 1113, Society for Computational Economics.
  16. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1997. "Cointegration and Changes in Regime: The Japanese Consumption Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 151-68, March-Apr.
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