24 Pages Posted: 2 Jun 2006
We show that changes in the innovation covariance matrix of a vector of series can generate spurious rejections of the null hypothesis of co-integration when applying standard residual-based co-integration tests. A bootstrap solution to the inference problem is suggested which is shown to perform well in practice, redressing the size problems associated with the standard test but not losing power relative to the standard test under the alternative.
Suggested Citation: Suggested Citation
Cavaliere, Giuseppe and Taylor, A. M. Robert, Testing the Null of Co-Integration in the Presence of Variance Breaks. Journal of Time Series Analysis, Vol. 27, No. 4, pp. 613-636, July 2006. Available at SSRN: https://ssrn.com/abstract=905984 or http://dx.doi.org/10.1111/j.1467-9892.2006.00475.x
By Mary Finn
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