Tests for Cointegration Rank and the Initial Condition


Autoria(s): Ahlgren, Niklas; Juselius, Mikael
Contribuinte(s)

Hanken School of Economics, Department of Finance and Statistics, Statistics

Svenska handelshögskolan, institutionen för finansiell ekonomi och ekonomisk statistik, statistik

Data(s)

13/05/2009

Resumo

Many economic events involve initial observations that substantially deviate from long-run steady state. Initial conditions of this type have been found to impact diversely on the power of univariate unit root tests, whereas the impact on multivariate tests is largely unknown. This paper investigates the impact of the initial condition on tests for cointegration rank. We compare the local power of the widely used likelihood ratio (LR) test with the local power of a test based on the eigenvalues of the companion matrix. We find that the power of the LR test is increasing in the magnitude of the initial condition, whereas the power of the other test is decreasing. The behaviour of the tests is investigated in an application to price convergence.

Many economic events involve initial observations that substantially deviate from long-run steady state. Initial conditions of this type have been found to impact diversely on the power of univariate unit root tests, whereas the impact on multivariate tests is largely unknown. This paper investigates the impact of the initial condition on tests for cointegration rank. We compare the local power of the widely used likelihood ratio (LR) test with the local power of a test based on the eigenvalues of the companion matrix. We find that the power of the LR test is increasing in the magnitude of the initial condition, whereas the power of the other test is decreasing. The behaviour of the tests is investigated in an application to price convergence.

Identificador

http://hdl.handle.net/10227/347

URN:ISBN:978-952-232-031-5

978-952-232-031-5

0357-4598

Idioma(s)

en

Publicador

Hanken School of Economics

Svenska handelshögskolan

Relação

Working Papers

539

Direitos

Publikationen är skyddad av upphovsrätten. Den får läsas och skrivas ut för personligt bruk. Användning i kommersiellt syfte är förbjuden.

Julkaisu on tekijänoikeussäännösten alainen. Teosta voi lukea ja tulostaa henkilökohtaista käyttöä varten. Käyttö kaupallisiin tarkoituksiin on kielletty.

This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.

Palavras-Chave #asymptotic local power #cointergration #companion matrix #convergence #initial condition #likelihood ratio test #unit root #Statistics