The Error Correction Model as a Test for Cointegration
In this paper we generate critical values for a test for cointegration based on the joint significance of the levels terms in an error correction equation. We show that the appropriate critical values are higher than those derived from the standard F-distribution. We compare the power properties of this test with those of the Engle-Granger test and Kremers et al´s t-test based on the t-statistic from an error correction equation. The F-test has higher power than the Engle-Granger test but lower power than the t-form of the error correction test. However, the F-form of the test has the advantage that its distribution is independent of the parameters of the problem being considered. Finally, we consider a test for cointegration between UK and US interest rates. We show that the F-test rejects the null of no cointegration between these variables although the Engle-Granger test fails to do so.
|Date of creation:||Mar 2003|
|Date of revision:||Mar 2003|
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- Neil R. Ericsson & James G. MacKinnon, 2000.
"Distributions of Error Correction Tests for Cointegration,"
Econometric Society World Congress 2000 Contributed Papers
0561, Econometric Society.
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"The Power of Cointegration Tests,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 54(3), pages 325-348, August.
- Williams, D, 1978. "Estimating in Levels or First Differences: A Defence of the Method Used for Certain Demand-for-Money Equations," Economic Journal, Royal Economic Society, vol. 88(351), pages 564-568, September.
- Engle, Robert & Granger, Clive, 2015.
"Co-integration and error correction: Representation, estimation, and testing,"
Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-276, March.
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