Testing for the Cointegrating Rank of a VAR Process with Level Shift and Trend Break

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Testing for the Cointegrating Rank of a VAR Process with Level Shift and Trend Break

TRENKLER, Carsten; SAIKKONEN, Pentti; LUETKEPOHL, Helmut
Title: Testing for the Cointegrating Rank of a VAR Process with Level Shift and Trend Break
Author: TRENKLER, Carsten; SAIKKONEN, Pentti; LUETKEPOHL, Helmut
Subject: Cointegration; structural break; vector autoregressive process; error correction model
Date: 2006
Publisher: European University Institute
Series/Report no.: EUI ECO; 2006/29
URI: http://hdl.handle.net/1814/6306
ISSN: 1725-6704

Abstract:

A test for the cointegrating rank of a vector autoregressive (VAR) process with a possible shift and broken linear trend is proposed. The break point is assumed to be known. The setup is a VAR process for cointegrated variables. The tests are not likelihood ratio tests but the deterministic terms including the broken trends are removed ¯rst by a GLS proce- dure and a likelihood ratio type test is applied to the adjusted series. The asymptotic null distribution of the test is derived and it is shown by a Monte Carlo experiment that the test has better small sample properties in many cases than a corresponding Gaussian likelihood ratio test for the cointegrating rank.

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  • ECO Working Papers
    Working Papers of the Economics Department of the EUI. ISSN 1725-6704