Working Papers, Hanken School of Economics
No 539:
Tests for Cointegration Rank and the Initial Condition
Niklas Ahlgren ()
and Mikael Juselius ()
Abstract: Many economic events involve initial observations that
substantially deviate from long-run steady state. Initial conditions of
this type have been found to impact diversely on the power of univariate
unit root tests, whereas the impact on multivariate tests is largely
unknown. This paper investigates the impact of the initial condition on
tests for cointegration rank. We compare the local power of the widely used
likelihood ratio (LR) test with the local power of a test based on the
eigenvalues of the companion matrix. We find that the power of the LR test
is increasing in the magnitude of the initial condition, whereas the power
of the other test is decreasing. The behaviour of the tests is investigated
in an application to price convergence.
Keywords: asymptotic local power; cointegration; companion matrix; convergence; initial condition; likelihood ratio test; unit root; (follow links to similar papers)
43 pages, May 13, 2009
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- Publication Data:
- Forthcoming as Ahlgren, Niklas and Mikael Juselius, 'Tests for Cointegration Rank and the Initial Condition ' in Empirical Economics., 2011.
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