New Improved Tests for Cointegration with Structural Breaks

Joakim Westerlund · David Edgerton

128 citations0/0 files storedJournal of Time Series Analysis

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Abstract

Abstract. This article proposes Lagrange multiplier‐based tests for the null hypothesis of no cointegration. The tests are general enough to allow for heteroskedastic and serially correlated errors, deterministic trends, and a structural break of unknown timing in both the intercept and slope. The limiting distributions of the test statistics are derived, and are found to be invariant not only with respect to the trend and structural break, but also with respect to the regressors. A small Monte Carlo study is also conducted to investigate the small‐sample properties of the tests. The results reveal that the tests have small size distortions and good power relative to other tests.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1991Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models 2002Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis 1987Time Series Regression with a Unit Root 1996Residual-based tests for cointegration in models with regime shifts 1990Asymptotic Properties of Residual Based Tests for Cointegration 1992Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis 1991Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots

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