Department of Economics and Business Economics

Co-integration Rank Testing under Conditional Heteroskedasticity

Research output: Working paperResearch

  • Guiseppe Cavaliere, University of Bologna, Italy
  • Anders Rahbæk, Denmark
  • A.M. Robert Taylor, University of Nottingham, United Kingdom
  • School of Economics and Management
We analyse the properties of the conventional Gaussian-based co-integrating
rank tests of Johansen (1996) in the case where the vector of series under test
is driven by globally stationary, conditionally heteroskedastic (martingale differ-
ence) innovations. We first demonstrate that the limiting null distributions of the
rank statistics coincide with those derived by previous authors who assume either
i.i.d. or (strict and covariance) stationary martingale difference innovations. We
then propose wild bootstrap implementations of the co-integrating rank tests and
demonstrate that the associated bootstrap rank statistics replicate the first-order
asymptotic null distributions of the rank statistics. We show the same is also true
of the corresponding rank tests based on the i.i.d. bootstrap of Swensen (2006).
The wild bootstrap, however, has the important property that, unlike the i.i.d.
bootstrap, it preserves in the re-sampled data the pattern of heteroskedasticity
present in the original shocks. Consistent with this, numerical evidence sug-
gests that, relative to tests based on the asymptotic critical values or the i.i.d.
bootstrap, the wild bootstrap rank tests perform very well in small samples un-
der a variety of conditionally heteroskedastic innovation processes. An empirical
application to the term structure of interest rates is given.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages46
Publication statusPublished - 2009

    Research areas

  • Co-integration, trace and maximum eigenvalue rank tests, conditional heteroskedasticity, i.i.d. bootstrap, wild bootstrap

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ID: 16375132