A Simple Approach to Robust Inference in a Cointegrating System

25 Pages Posted: 7 Dec 2000

See all articles by Jonathan H. Wright

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: January 2000

Abstract

Cointegration requires all the variables in the system to have exact unit roots; accordingly it is conventional for researchers to test for a unit root in each variable prior to a cointegration analysis. Unfortunately, these unit root tests are not powerful. Meanwhile, conventional cointegration methods are not at all robust to slight violations of the requirement that each variable has a unit root. In this paper I show how this difficulty may be circumvented by instrumenting the regressors in the cointegrating regression by deterministic polynomial time trends, or by artificially generated random walks.

Keywords: Cointegration, Local to Unit Roots, Robustness, Instrumental Variables

JEL Classification: C22

Suggested Citation

Wright, Jonathan H., A Simple Approach to Robust Inference in a Cointegrating System (January 2000). Available at SSRN: https://ssrn.com/abstract=231838 or http://dx.doi.org/10.2139/ssrn.231838

Jonathan H. Wright (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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