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Title:The effects of ignoring level shifts on systems cointegration tests PDF Logo
Authors:Trenkler, Carsten
Issue Date:2002
Series/Report no.:Discussion Papers, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 2002,68
Abstract:In this paper I analyse the effects of ignoring level shifts in the data generating process (DGP) on systems cointegration tests that do not accommodate level shifts. I consider two groups of Likelihood Ratio tests based on procedures suggested by Johansen (1988, 1995) and Saikkonen & Lütkepohl (2000b). The Monte Carlo analysis reveals that ignoring level shifts reduces the tests' sizes to zero and causes an important drop in the small sample power for increasing shift magnitudes. These observations are also reflected in two empirical applications in such a way that the tests find a cointegrating rank smaller than one suggested by procedures which accommodate the shifts.
Subjects:Systems cointegration tests
Level shifts
Monte Carlo study
Persistent Identifier of the first edition:urn:nbn:de:kobv:11-10049310
Document Type:Working Paper
Appears in Collections:Discussion Papers, SFB 373, HU Berlin

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