IV‐Based Cointegration Testing in Dependent Panels with Time‐Varying Variance

14 Pages Posted: 27 Aug 2014

See all articles by Matei Demetrescu

Matei Demetrescu

Goethe University Frankfurt - Faculty of Economics and Business Administration

Christoph Hanck

University of Dortmund - Department of Statistics

Adina I. Tarcolea

Goethe University Frankfurt

Date Written: September 2014

Abstract

The distributions of cointegration tests are affected when the innovation variance varies over time. In panels, one must also pay attention to dependence among units. To obtain a panel cointegration test robust to both heteroskedasticity and dependence, we adapt the nonlinear instruments method proposed for the Dickey–Fuller test by Chang (2002, J Econometrics 110, 261–292) to an error‐correction framework. We show that IV‐based testing of the no error‐correction null in individual equations yields standard normal test statistics when computed with heteroskedasticity‐robust standard errors. The result holds under endogenous regressors, irrespective of the number of integrated covariates and for any variance profile. A non‐cointegration test combining single‐equation tests retains these nice properties. In panels of fixed cross‐sectional dimension, such test statistics from individual units are shown to be asymptotically independent even under dependence, leading to panel tests robust to dependence and heteroskedasticity. The tests perform well in finite panels.

Keywords: heteroskedasticity, dependent units, cointegration, instrumental variable

Suggested Citation

Demetrescu, Matei and Hanck, Christoph and Tarcolea, Adina I., IV‐Based Cointegration Testing in Dependent Panels with Time‐Varying Variance (September 2014). Journal of Time Series Analysis, Vol. 35, Issue 5, pp. 393-406, 2014, Available at SSRN: https://ssrn.com/abstract=2487578 or http://dx.doi.org/10.1111/jtsa.12071

Matei Demetrescu (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Statistics and Econometric Methods
Frankfurt am Main
Germany

Christoph Hanck

University of Dortmund - Department of Statistics ( email )

D-44221 Dortmund
Germany

Adina I. Tarcolea

Goethe University Frankfurt

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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