Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/65312 
Year of Publication: 
2002
Series/Report no.: 
SFB 373 Discussion Paper No. 2002,68
Publisher: 
Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes, Berlin
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
JEL: 
C32
C15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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