End-of-Sample Cointegration Breakdown Tests

56 Pages Posted: 8 Mar 2003

See all articles by Donald W. K. Andrews

Donald W. K. Andrews

Yale University - Cowles Foundation

Jae-Young Kim

SUNY - Albany

Date Written: March 2003


This paper introduces tests for cointegration breakdown that may occur over a relatively short time period, such as at the end of the sample. The breakdown may be due to a shift in the cointegrating vector or due to a shift in the errors from being I(0) to being I(1). Tests are introduced based on the post-breakdown sum of squared residuals and the post-breakdown sum of squared reverse partial sums of residuals. Critical values are provided using a parametric subsampling method.

The regressors in the model are taken to be arbitrary linear combinations of deterministic, stationary, and integrated random variables. The tests are asymptotically valid when the number of observations in the breakdown period, m, is fixed and finite as the total sample size, T+m, goes to infinity. The tests are asymptotically valid under weak conditions.

Simulation results indicate that the tests work well in the scenarios considered.

Use of the tests is illustrated by testing for interest rate parity breakdown during the Asian financial crisis of 1997. Breakdown, Parameter Change Test, Structural Change

Keywords: Cointegration, Least Squares Estimator, Model

JEL Classification: C12, C52

Suggested Citation

Andrews, Donald W. K. and Kim, Jae-Young, End-of-Sample Cointegration Breakdown Tests (March 2003). Available at SSRN: https://ssrn.com/abstract=386081

Donald W. K. Andrews (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3698 (Phone)
203-432-6167 (Fax)

Jae-Young Kim

SUNY - Albany ( email )

Department of Economics
Albany, NY 12222-0001
United States

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