Tests for Cointegration Rank and the Initial Condition
| Contribuinte(s) |
Hanken School of Economics, Department of Finance and Statistics, Statistics Svenska handelshögskolan, institutionen för finansiell ekonomi och ekonomisk statistik, statistik |
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| Data(s) |
13/05/2009
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| 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 |
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| Palavras-Chave | #asymptotic local power #cointergration #companion matrix #convergence #initial condition #likelihood ratio test #unit root #Statistics |
