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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.
URI: http://hdl.handle.net/10227/371
Date: 2009-06-11
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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