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

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https://hdl.handle.net/1814/6306
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1725-6704
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2006
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Working Paper
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Cointegration; Structural break; Vector autoregressive process; Error correction model
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EUI ECO; 2006/29
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TRENKLER, Carsten, SAIKKONEN, Pentti, LUETKEPOHL, Helmut, Testing for the Cointegrating Rank of a VAR Process with Level Shift and Trend Break, EUI ECO, 2006/29 - https://hdl.handle.net/1814/6306
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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European University Institute
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