Improved likelihood ratio tests for cointegration rank in the VAR model

H. Peter Boswijk; Michael Jansson; Morten Ørregaard Nielsen

doi:10.1016/j.jeconom.2014.08.007

Improved likelihood ratio tests for cointegration rank in the VAR model

H. Peter Boswijk, Michael Jansson, Morten Ørregaard Nielsen

Institut for Økonomi - CREATES

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avis › Tidsskriftartikel › Forskning › peer review

10 Citationer (Scopus)

Abstract

We suggest improved tests for cointegration rank in the vector autoregressive (VAR) model and develop asymptotic distribution theory and local power results. The tests are (quasi-)likelihood ratio tests based on a Gaussian likelihood, but as usual the asymptotic results do not require normally distributed innovations. Our tests differ from existing tests in two respects. First, instead of basing our tests on the conditional (with respect to the initial observations) likelihood, we follow the recent unit root literature and base our tests on the full likelihood as in, e.g., Elliott et al. (1996). Second, our tests incorporate a “sign” restriction which generalizes the one-sided unit root test. We show that the asymptotic local power of the proposed tests dominates that of existing cointegration rank tests.

Originalsprog	Engelsk
Tidsskrift	Journal of Econometrics
Vol/bind	184
Nummer	1
Sider (fra-til)	97-110
Antal sider	14
ISSN	0304-4076
DOI	https://doi.org/10.1016/j.jeconom.2014.08.007
Status	Udgivet - 2015

Emneord

Cointegration rank
Efficiency
Likelihood ratio test
Vector autoregression

Adgang til dokumentet

10.1016/j.jeconom.2014.08.007

http://www.sciencedirect.com/science/article/pii/S0304407614001869

Citationsformater

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AB - We suggest improved tests for cointegration rank in the vector autoregressive (VAR) model and develop asymptotic distribution theory and local power results. The tests are (quasi-)likelihood ratio tests based on a Gaussian likelihood, but as usual the asymptotic results do not require normally distributed innovations. Our tests differ from existing tests in two respects. First, instead of basing our tests on the conditional (with respect to the initial observations) likelihood, we follow the recent unit root literature and base our tests on the full likelihood as in, e.g., Elliott et al. (1996). Second, our tests incorporate a “sign” restriction which generalizes the one-sided unit root test. We show that the asymptotic local power of the proposed tests dominates that of existing cointegration rank tests.

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KW - Efficiency

KW - Likelihood ratio test

KW - Vector autoregression

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JF - Journal of Econometrics

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