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Testing for cointegration using the Johansen methodology when variables are near-integrated: size distortions and partial remedies
Division of International Finance, Board of Governors of the Federal Reserve System, Washington DC, United States.
National Institute of Economic Research, Stockholm, Sweden.ORCID iD: 0000-0002-4840-7649
2010 (English)In: Empirical Economics, ISSN 0377-7332, E-ISSN 1435-8921, Vol. 39, no 1, 51-76 p.Article in journal (Refereed) Published
Abstract [en]

We investigate the properties of Johansen’s (J Econ Dyn Control 12:231–254, 1988; Econometrica 59:1551–1580, 1991) maximum eigenvalue and trace testsfor cointegration under the empirically relevant situation of near-integrated variables. Using MonteCarlo techniques, we showthat in a systemwith near-integrated variables, the probability of reaching an erroneous conclusion regarding the cointegrating rank of the system is generally substantially higher than the nominal size. The risk of concluding that completely unrelated series are cointegrated is therefore non-negligible. We suggest ways of identifying the problem and different approaches to reduce the size distortions of the tests.

Place, publisher, year, edition, pages
Physica Verlag, 2010. Vol. 39, no 1, 51-76 p.
Keyword [en]
Cointegration, Near unit root, Spurious rejection
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:oru:diva-58349DOI: 10.1007/s00181-009-0294-6ISI: 000279709000003Scopus ID: 2-s2.0-77954456499OAI: oai:DiVA.org:oru-58349DiVA: diva2:1116961
Available from: 2017-06-28 Created: 2017-06-28 Last updated: 2017-10-18Bibliographically approved

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Österholm, Pär

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