Pitfalls in testing for long run relationships

Gonzalo, Jesús; Lee, Tae‐Hwy

doi:10.1016/s0304-4076(97)00111-5

Cited by 164 publications

(97 citation statements)

References 50 publications

(52 reference statements)

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“…This issue can have serious consequences for the analysis of the medium and long-run properties of macroeconomic and …nancial variables. For instance, (i) shocks could be identi…ed as permanent when in fact they die out eventually, and (ii) two series could be considered as spuriously cointegrated when they are independent at all leads and lags (see Gonzalo and Lee, 1998). Further, these mistakes are more likely to occur in the presence of deterministic components as, e.g.…”

Section: Introductionmentioning

confidence: 99%

Wald Tests of I(1) against I(d) Alternatives: Some New Properties and an Extension to Processes with Trending Components

Dolado¹,

Gonzalo²,

Mayoral³

2008

Studies in Nonlinear Dynamics &Amp; Econometrics

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This paper analyses the behaviour of a Wald-type test, i.e., the (E¢ cient) Fractional Dickey-Fuller (EFDF) test of I(1) against I(d); d < 1; relative to LM tests. Further, it extends the implementation of the EFDF test to the presence of deterministic trending components in the DGP. Tests of these hypotheses are important in many macroeconomic applications where it is crucial to distinguish between permanent and transitory shocks because shocks die out in I(d) processes with d < 1. We show how simple is the implementation of the EFDF in these situations and argue that, under …xed alternatives, it is preferred to the LM test in Bahadur´s sense. Finally, an empirical application is provided where the EFDF approach allowing for deterministic components is used to test for long-memory in the GDP p.c. of several OECD countries, an issue that has important consequences to discriminate between alternative growth theories.JEL Clasi…cation: C12 C22 O40

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Section: Introductionmentioning

confidence: 99%

Wald Tests of I(1) against I(d) Alternatives: Some New Properties and an Extension to Processes with Trending Components

Dolado¹,

Gonzalo²,

Mayoral³

2008

Studies in Nonlinear Dynamics &Amp; Econometrics

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“…One group of tests looks at the full system of equations in a VAR framework (Johansen's tests, Stock and Watson (1988) SW test, tests on the coefficient of the error correction terms among others) while a second group looks at single equation regressions involving the variables that are potentially cointegrated (Engle and Granger Augmented (Haug (1996), Gonzalo and Lee (1998), Bewley and Yang (1998), Boswijk and Frances (1992), Kremers et al (1992) and Ericsson and Mackinnon (1999) …”

Section: Introductionmentioning

confidence: 99%

Analytical Evaluation of the Power of Tests for the Absence of Cointegration

Pesavento

2001

SSRN Journal

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This paper proposes a theoretical explanation to the common empirical results in which different tests for cointegration give different answers. Using local to unity parametrization I compute the analytical power of some tests for the null of no cointegration: The ADF test on the residuals of the cointegration regression, Johansen's maximum eigenvalue test, the t-test on the Error Correction term and Boswijk (1994) Wald test. The tests are shown to be functions of Brownian Motions and Ornstein-Uhlenbeck processes and to depend on a single nuisance parameter, which is, in turn determined by the correlation at frequency zero of the independent variables with the errors of the cointegration regression. Monte Carlo experiments show that the tests can have significantly different performances for different values of the nuisance parameter. An application to the money demand equation is presented.JEL classification: C32

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“…As remarked by Gonzalo and Lee (1998), when breaks are present in mean or/and trend spurious cointegration may occur. Likewise, Noh and Kim (2003) indicated that if breaks occur in the variance of innovation errors of two independent time series, especially in early periods, spurious cointegration can appear.…”

Section: Maki (2012) Cointegration Analysismentioning

confidence: 90%