Extensions of the Pesaran, Shin and Smith (2001) Bounds Testing Procedure

46 Pages Posted: 22 Feb 2021

See all articles by Georgios Bertsatos

Georgios Bertsatos

Athens University of Economics and Business

Plutarchos Sakellaris

Athens University of Economics and Business

Mike Tsionas

Lancaster University

Date Written: December 06, 2020

Abstract

We replicate the Pesaran, Shin and Smith (2001) bounds testing procedure (BTP), and extend it with 6 new cases, 4 of which involve a quadratic trend. We provide critical values for the BTP of the lagged regressors in levels under the framework of unrestricted error-correction models (UECMs) to account for degenerate cases of co-integration. Further, we extend the BTP with 11 cases for the quantile UECMs of Cho, Kim and Shin, and present critical values for inter-decile and interquartile BTPs for the unrestricted cases. We extend the Shin, Yu and Greenwood-Nimmo methodology to account for non-linear, or asymmetric, responses of the dependent variables to its covariates (NARDL) and for distributional, or location, asymmetry (QARDL of Cho, Kim and Shin; of the dependent variable. We call this quantile non-linear ARDL, or QNARDL. We provide codes that generate sample-specific critical values of the BTPs. We utilize these critical values in an empirical application of a dynamic equity valuation model for the S&P Global Index. We find that mis-specifying a non-linear relationship as linear produces misleading results and policy implications. There is strong evidence of: (i) trading activity based on fundamentals and (ii) the existence of a stable equilibrium relationship for the price-to-book (PB) ratio of the market index and its fundamentals. During periods of high PB relative to its fundamental values, convergence to equilibrium is faster than during periods of relatively low PB. There is also evidence of momentum trading, i.e. of traders that rely on positive feedback.

Keywords: Asymmetric Co-integrating Relationships, Bounds Testing Procedure, Quantile Non-linear ARDL (QNARDL), S&P Global Index, Unrestricted Error-correction Models

JEL Classification: C12, C22, E32, G15, G40

Suggested Citation

Bertsatos, Georgios and Sakellaris, Plutarchos and Tsionas, Efthymios G., Extensions of the Pesaran, Shin and Smith (2001) Bounds Testing Procedure (December 06, 2020). Available at SSRN: https://ssrn.com/abstract=3747533 or http://dx.doi.org/10.2139/ssrn.3747533

Georgios Bertsatos

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece
2108203304 (Phone)

HOME PAGE: http://www.linkedin.com/in/georgio13ertsatos

Plutarchos Sakellaris (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece
+302108203304 (Phone)
+3012108203383 (Fax)

Efthymios G. Tsionas

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom

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