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Testing the Null of Co-Integration in the Presence of Variance Breaks

24 Pages Posted: 2 Jun 2006  

Giuseppe Cavaliere

University of Bologna

A. M. Robert Taylor

University of Birmingham - Department of Economics

Abstract

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

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

Giuseppe Cavaliere (Contact Author)

University of Bologna ( email )

Via Belle Arti 41
Bologna, 40125
Italy
+39 0512098230 (Phone)
+39 051232153 (Fax)

A. M. Robert Taylor

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

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