TESTING FOR THE COINTEGRATING RANK OF A VAR PROCESS WITH AN INTERCEPT

Pentti Saikkonen · Helmut Lütkepohl

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Abstract

Testing the cointegrating rank of a vector autoregressive process with an intercept is considered. In addition to the likelihood ratio (LR) tests developed by Johansen and Juselius (1990, Oxford Bulletin of Economics and Statistics, 52, 169–210) and others we also consider an alternative class of tests that is based on estimating the trend parameters of the deterministic term in a different way. The asymptotic local power of these tests is derived and compared to that of the corresponding LR tests. The small sample properties are investigated by simulations. The new tests are seen to be substantially more powerful than conventional LR tests.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1992A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics1 1992DETERMINATION OF COINTEGRATION RANK IN THE PRESENCE OF A LINEAR TREND 1994The role of the constant and linear terms in cointegration analysis of nonstationary variables

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