The Power of Single Equation Tests for Cointegration when the Cointegrating Vector is Prespecified

Eric Zivot ()

Econometrics from University Library of Munich, Germany

Abstract: In this paper I present an alternative derivation of the asymptotic distribution of Kremers, Ericsson and Dolado's (1992) conditional ECM- based t-test for no-cointegration with a single prespecified cointegrating vector. This alternative distribution, which is identical to the distribution of Hansen's (1995) covariate augmented t-test for a unit root, is valid for weakly exogenous regressors and depends on a consistently estimable nuisance parameter that takes on values in the unit interval. I show analytically, using asymptotic power functions based on near cointegrated alternatives, that the ECM t-test with a prespecified cointegrating vector can have much higher power than single equation tests for cointegration based on estimating the cointegrating vector. I also characterize situations in which the ECM t-test computed with a misspecified cointegrating vector will have high power.

Keywords: cointegration; common factor; error correction model; local power; misspecification; near-cointegration; strong exogeneity; weak exogeneity. (search for similar items in EconPapers)
JEL-codes: C22 C51 (search for similar items in EconPapers)
Pages: 25 pages
Date: 1996-12-02
Note: Type of Document - Adobe .pdf file; prepared on IBM-PC; pages: 25; figures: 25, in separate file ecmfigs.pdf
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpem:9612001

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