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The exact maximum likelihood-based test for fractional cointegration: critical values, power and size

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  • E. Dubois
  • S. Lardic
  • V. Mignon

Abstract

The exact maximum likelihood (EML) procedure can be used as a residual-based test of the hypothesis of no cointegration against the alternative of fractional cointegration. Since the corresponding asymptotic properties have not yet been established, this paper provides simulated critical values, power and size relating to the EML-based test for fractional cointegration. Monte Carlo simulations indicate that the simulated density of the EML-based test is shifted to the left compared to the standard normal distribution and exhibits a strong excess of kurtosis in the absence of autoregressive components in the regression residuals. The power and size comparison indicates that the EML-based test is more powerful than other fractional cointegration tests (Lo, Lobato-Robinson and Geweke and Porter-Hudak) in small and medium sample sizes. Moreover, by simulating integrated time series with AR(1), and respectively MA(1), disturbances, it is shown that, whatever the sample size, the EML-based test exhibits the lowest size distortions for positive AR(1) and negative MA(1) coefficients, respectively. Copyright Kluwer Academic Publishers 2004
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  • E. Dubois & S. Lardic & V. Mignon, 2003. "The exact maximum likelihood-based test for fractional cointegration: critical values, power and size," THEMA Working Papers 2003-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2003-26
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    Cited by:

    1. Marcel Aloy & Gilles de Truchis, 2012. "Estimation and Testing for Fractional Cointegration," Working Papers halshs-00793206, HAL.
    2. Marco R. Barassi & Gianluigi De Pascale & Raffaele Lagravinese, 2021. "Testing the law of one-price in the US gasoline market: a long memory approach," SERIES 03-2021, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Jun 2021.
    3. Valérie Mignon & Sandrine Lardic, 2003. "Cointégration fractionnaire entre la consommation et le revenu," Économie et Prévision, Programme National Persée, vol. 158(2), pages 123-142.
    4. Dufrénot, Gilles & Lardic, Sandrine & Mathieu, Laurent & Mignon, Valérie & Péguin-Feissolle, Anne, 2008. "Explaining the European exchange rates deviations: Long memory or non-linear adjustment?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(3), pages 207-215, July.
    5. M.Y. TEWELDEMEDHIN & H.D. VAN SCHALKWYK & Rena RAVINDER, 2009. "The Agricultural Industry And Economic Growth In South Africa – An Empirical Analysis," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 4, pages 43-56, November.

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