Finite Sample Properties of Likelihood Ratio Tests for Cointegrating Ranks when Linear Trends are Present

Hiro Y. Toda

154 citations0/0 files storedThe Review of Economics and Statistics

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Monetary Policy and Economic Impact Financial Risk and Volatility Modeling Diverse Scientific and Economic Studies

Abstract

This paper investigates the finite sample properties of likelihood ratio tests for 'stochastic cointegration' that have recently been proposed by S. Johansen and P. Perron and J. Y. Campbell. The author transforms the model into a canonical form and conducts a comprehensive simulation study. He finds that the test performance is very sensitive to the value of the stationary root(s) of the process and to the correlation between the innovations that drive the stationary and nonstationary components of the process. Unfortunately, the simulation results suggest that these asymptotic test procedures are not very powerful for sample sizes that are typical for economic time series. Copyright 1994 by MIT Press.

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References

1988Statistical analysis of cointegration vectors 1991Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models 1991Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots 1992DETERMINATION OF COINTEGRATION RANK IN THE PRESENCE OF A LINEAR TREND 1995Finite Sample Performance of Likelihood Ratio Tests for Cointegrating Ranks in Vector Autoregressions

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