Monitoring Stationarity and Cointegration

71 Pages Posted: 1 Jul 2015

See all articles by Martin Wagner

Martin Wagner

Department of Economics, University of Klagenfurt; Bank of Slovenia; Institute for Advanced Studies (IHS)

Dominik Wied

University of Cologne

Date Written: June 29, 2015

Abstract

We propose a monitoring procedure to detect a structural change from stationary to integrated behavior. When the procedure is applied to the residuals of a relationship between integrated series it thus monitors a structural change from a cointegrating relationship to a spurious relationship. The cointegration monitoring procedure is based on residuals from modified least squares estimation, using either Fully Modified, Dynamic or Integrated Modified OLS. The procedure is inspired by Chu et al. (1996) in that it is based on parameter estimation on a pre-break "calibration" period only rather than being based on sequential estimation over the full sample. We investigate the asymptotic behavior of the procedures under the null, for (fixed and local) alternatives and in case of parameter changes. We also study the finite sample performance via simulations. An application to credit default swap spreads illustrates the potential usefulness of the procedure.

Keywords: Cointegration, Monitoring, Stationarity, Structural Change, Unit Roots

JEL Classification: C22, C32, C52

Suggested Citation

Wagner, Martin and Wied, Dominik, Monitoring Stationarity and Cointegration (June 29, 2015). Available at SSRN: https://ssrn.com/abstract=2624657 or http://dx.doi.org/10.2139/ssrn.2624657

Martin Wagner

Department of Economics, University of Klagenfurt ( email )

Universitaetsstrasse 65-67
Klagenfurt, 9020
Austria

Bank of Slovenia ( email )

Slovenska cesta 35
Ljubljana, 1505
Slovenia

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
Vienna, 1080
Austria

Dominik Wied (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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