Tests for Cointegration Breakdown Over a Short Time Period

Abstract

This article introduces tests for cointegration breakdown that may occur over a relatively short time period, such as at the end of the sample. The breakdown may be due to a shift in the cointegrating vector or due to a shift in the errors from being I(0) to being I(1). Tests are introduced based on the postbreakdown sum of squared residuals and sum of squared reverse partial sums of residuals. Critical values are provided using a subsampling method. Asymptotic results take the number of observations in the breakdown period, m, to be fixed while the total sample size, T + m, goes to infinity.

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