Tests for Cointegration Rank and the Initial Condition

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Titel: Tests for Cointegration Rank and the Initial Condition
Author: Ahlgren, Niklas; Juselius, Mikael
Medarbetare: Svenska handelshögskolan, institutionen för finansiell ekonomi och ekonomisk statistik, statistik
Tillhör serie: Working Papers - 539
ISSN: 0357-4598
ISBN: 978-952-232-031-5
Abstrakt: 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.
Permanenta länken (URI): http://hdl.handle.net/10227/347
URN:ISBN:978-952-232-031-5
Datum: 2009-05-13
Copyright information: Publikationen är skyddad av upphovsrätten. Den får läsas och skrivas ut för personligt bruk. Användning i kommersiellt syfte är förbjuden.
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