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Residual-based tests for cointegration and multiple regime shifts

Author

Listed:
  • Vasco J. Gabriel

    (Universidade do Minho)

  • Martin Sola

    (Birkbeck College, University of London
    Universidad Torcuato Di Tella, Argentina)

  • Zacharias Psaradakis

    (Birkbeck College, University of London)

Abstract

In this paper we examine the properties of several cointegration tests when long run parameters are subject to multiple shifts, resorting to Monte Carlo methods. We assume that the changes in cointegration regimes are governed by a unobserved Markov chain process. This specification has the considerable advantage of allowing for an unspecified number of stochastic breaks, unlike previous works that consider a single, deterministic break. Our Monte Carlo analysis reveals that testing cointegration with the usual procedures is a quite unreliable task, since the performance of the tests is poor for a number of plausible regime shifts parameterizations.

Suggested Citation

  • Vasco J. Gabriel & Martin Sola & Zacharias Psaradakis, 2002. "Residual-based tests for cointegration and multiple regime shifts," NIPE Working Papers 7/2002, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:7/2002
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    File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2002/NIPE_WP_7_2002.PDF
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    References listed on IDEAS

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    6. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    7. Franses, Philip Hans & Haldrup, Niels, 1994. "The Effects of Additive Outliers on Tests for Unit Roots and Cointegration," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 471-478, October.
    8. Driffill, John & Sola, Martin, 1998. "Intrinsic bubbles and regime-switching," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 357-373, July.
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    10. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
    11. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
    12. Hamori, Shigeyuki & Tokihisa, Akira, 1997. "Testing for a unit root in the presence of a variance shift1," Economics Letters, Elsevier, vol. 57(3), pages 245-253, December.
    13. 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.
    14. Leybourne, Stephen J. & C. Mills, Terence & Newbold, Paul, 1998. "Spurious rejections by Dickey-Fuller tests in the presence of a break under the null," Journal of Econometrics, Elsevier, vol. 87(1), pages 191-203, August.
    15. 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 151-168, March-Apr.
    16. Seo, Byeongseon, 1998. "Tests For Structural Change In Cointegrated Systems," Econometric Theory, Cambridge University Press, vol. 14(2), pages 222-259, April.
    17. 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.
    18. 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.
    19. Kuo, Biing-Shen, 1998. "Test for partial parameter instability in regressions with I(1) processes," Journal of Econometrics, Elsevier, vol. 86(2), pages 337-368, June.
    20. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, December.
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    Cited by:

    1. Carol Alexander & Anca Dimitriu, 2003. "Equity Indexing: Conitegration and Stock Price Dispersion: A Regime Switiching Approach to market Efficiency," ICMA Centre Discussion Papers in Finance icma-dp2003-02, Henley Business School, University of Reading.
    2. Gabriel, Vasco J. & Psaradakis, Zacharias & Sola, Martin, 2002. "A simple method of testing for cointegration subject to multiple regime changes," Economics Letters, Elsevier, vol. 76(2), pages 213-221, July.
    3. Vasco J. Gabriel & Martin Sola & Zacharias Psaradakis, 2001. "A simple method for testing cointegration subject to regime changes," NIPE Working Papers 15/2001, NIPE - Universidade do Minho.

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    More about this item

    Keywords

    Cointegration; Tests; Structural change; Markov Switching; Monte Carlo;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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