Improved Likelihood Ratio Tests for Cointegration Rank in the VAR Model

Tinbergen Institute Discussion Paper 12-097/III

23 Pages Posted: 22 Sep 2012

See all articles by H. Peter Boswijk

H. Peter Boswijk

Amsterdam School of Economics; Tinbergen Institute

Michael Jansson

University of California, Berkeley - Department of Economics

Morten Ørregaard Nielsen

Queen's University - Department of Economics

Date Written: September 19, 2012

Abstract

We suggest improved tests for cointegration rank in the vector autoregressive (VAR) model and develop asymptotic distribution theory and local power results. The tests are (quasi-)likelihood ratio tests based on a Gaussian likelihood, but of course the asymptotic results apply more generally. The power gains relative to existing tests are due to two factors. First, instead of basing our tests on the conditional (with respect to the initial observations) likelihood, we follow the recent unit root literature and base our tests on the full likelihood as in, e.g., Elliott, Rothenberg, and Stock (1996). Secondly, our tests incorporate a 'sign' restriction which generalizes the one-sided unit root test. We show that the asymptotic local power of the proposed tests dominates that of existing cointegration rank tests.

Keywords: Cointegration rank, efficiency, likelihood ratio test, vector autoregression

JEL Classification: C12, C32

Suggested Citation

Boswijk, H. Peter and Jansson, Michael and Nielsen, Morten Orregaard, Improved Likelihood Ratio Tests for Cointegration Rank in the VAR Model (September 19, 2012). Tinbergen Institute Discussion Paper 12-097/III, Available at SSRN: https://ssrn.com/abstract=2150180 or http://dx.doi.org/10.2139/ssrn.2150180

H. Peter Boswijk (Contact Author)

Amsterdam School of Economics ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profile/h.p.boswijk

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Michael Jansson

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Morten Orregaard Nielsen

Queen's University - Department of Economics ( email )

94 University Avenue
Kingston K7L 3N6, Ontario
Canada

HOME PAGE: http://www.econ.queensu.ca/faculty/nielsen/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
373
PlumX Metrics