Testing for Cointegration Using the Johansen Methodology when Variables are Near-Integrated
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Summary:
We investigate the properties of Johansen's (1988, 1991) maximum eigenvalue and trace tests for cointegration under the empirically relevant situation of near-integrated variables. Using Monte Carlo techniques, we show that in a system with near-integrated variables, the probability of reaching an erroneous conclusion regarding the cointegrating rank of the system is generally substantially higher than the nominal size. The risk of concluding that completely unrelated series are cointegrated is therefore non-negligible. The spurious rejection rate can be reduced by performing additional tests of restrictions on the cointegrating vector(s), although it is still substantially larger than the nominal size.
Series:
Working Paper No. 2007/141
Subject:
Inflation Real exchange rates Vector autoregression Vector error correction models
English
Publication Date:
June 1, 2007
ISBN/ISSN:
9781451867053/1018-5941
Stock No:
WPIEA2007141
Pages:
19
Please address any questions about this title to publications@imf.org