Tests for Cointegration Rank and the Initial Condition

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Use this URL to link or cite this item: http://hdl.handle.net/10227/347
Title: Tests for Cointegration Rank and the Initial Condition
Author: Ahlgren, Niklas; Juselius, Mikael
Contributor: Hanken School of Economics, Department of Finance and Statistics, Statistics
Belongs to series: Working Papers - 539
ISSN: 0357-4598
ISBN: 978-952-232-031-5
Abstract: 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.
URI: http://hdl.handle.net/10227/347
URN:ISBN:978-952-232-031-5
Date: 2009-05-13
Copyright information: This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.
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