A Residual-Based Cointegration Test for Near Unit Root Variables

36 Pages Posted: 9 Dec 2007

See all articles by Erik Hjalmarsson

Erik Hjalmarsson

University of Gothenburg - Centre for Finance

Pär Österholm

Uppsala University - Department of Economics

Date Written: October 9, 2007

Abstract

Methods of inference based on a unit root assumption in the data are typically not robust to even small deviations from this assumption. In this paper, we propose robust procedures for a residual-based test of cointegration when the data are generated by a near unit root process. A Bonferroni method is used to address the uncertainty regarding the exact degree of persistence in the process. We thus provide a method for valid inference in multivariate near unit root processes where standard cointegration tests may be subject to substantial size distortions and standard OLS inference may lead to spurious results. Empirical illustrations are given by: (i) a re-examination of the Fisher hypothesis, and (ii) a test of the validity of the cointegrating relationship between aggregate consumption, asset holdings, and labor income, which has attracted a great deal of attention in the recent finance literature.

Keywords: Bonferroni test, cointegration, near unit roots

JEL Classification: C12, C22

Suggested Citation

Hjalmarsson, Erik and Osterholm, Par, A Residual-Based Cointegration Test for Near Unit Root Variables (October 9, 2007). FRB International Finance Discussion Paper No. 907, Available at SSRN: https://ssrn.com/abstract=1066746 or http://dx.doi.org/10.2139/ssrn.1066746

Erik Hjalmarsson (Contact Author)

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Par Osterholm

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 18 471 1632 (Phone)
+46 18 471 1478 (Fax)

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