Testing for Cointegration in Markov Switching Error Correction Models

Liang Hu and Yongcheol Shin

A chapter in Essays in Honor of Peter C. B. Phillips, 2014, vol. 33, pp 123-150 from Emerald Group Publishing Limited

Abstract: This paper proposes an efficient test designed to have power against alternatives where the error correction term follows a Markov switching dynamics. The adjustment to long run equilibrium is different in different regimes characterised by the hidden state Markov chain process. Using a general nonlinear MS-ECM framework, we propose an optimal test for the null of no cointegration against an alternative of a globally stationary MS cointegration. The Monte Carlo studies demonstrate that our proposed tests display superior powers compared to the linear tests. In an application to price-dividend relationships, our test is able to find cointegration while linear based tests fail to do so.

Keywords: Markov switching error correction models; optimal tests; Monte Carlo simulations; price and dividend; C12; C13; C32 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-905320140000033005

DOI: 10.1108/S0731-905320140000033005

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