The Power of Bootstrap Tests of Cointegration Rank with Financial Time Series

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Title: The Power of Bootstrap Tests of Cointegration Rank with Financial Time Series
Author: Ahlgren, Niklas; Antell, Jan
Contributor: Hanken School of Economics, Department of Finance and Statistics, Statistics
Belongs to series: Working Papers - 541
ISSN: 0357-4598
ISBN: 978-952-232-039-1
Abstract: Bootstrap likelihood ratio tests of cointegration rank are commonly used because they tend to have rejection probabilities that are closer to the nominal level than the rejection probabilities of the correspond- ing asymptotic tests. The e¤ect of bootstrapping the test on its power is largely unknown. We show that a new computationally inexpensive procedure can be applied to the estimation of the power function of the bootstrap test of cointegration rank. The bootstrap test is found to have a power function close to that of the level-adjusted asymp- totic test. The bootstrap test estimates the level-adjusted power of the asymptotic test highly accurately. The bootstrap test may have low power to reject the null hypothesis of cointegration rank zero, or underestimate the cointegration rank. An empirical application to Euribor interest rates is provided as an illustration of the findings.
Date: 2009-06-11
Subject: cointegration
likelihood ratio test
Rights: This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.

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