On the Validity of Tests for Asymmetry in Residual-Based Threshold Cointegration Models

Karl-Heinz Schild and Karsten Schweikert
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Karl-Heinz Schild: Department of Statistics, Philipps-University of Marburg, Universitätsstraße 25, 35037 Marburg, Germany
Karsten Schweikert: Core Facility Hohenheim, University of Hohenheim, Schloss Hohenheim 1 C, 70593 Stuttgart, Germany

Econometrics, 2019, vol. 7, issue 1, 1-13

Abstract: This paper investigates the properties of tests for asymmetric long-run adjustment which are often applied in empirical studies on asymmetric price transmissions. We show that substantial size distortions are caused by preconditioning the test on finding sufficient evidence for cointegration in a first step. The extent of oversizing the test for long-run asymmetry depends inversely on the power of the primary cointegration test. Hence, tests for long-run asymmetry become invalid in cases of small sample sizes or slow speed of adjustment. Further, we provide simulation evidence that tests for long-run asymmetry are generally oversized if the threshold parameter is estimated by conditional least squares and show that bootstrap techniques can be used to obtain the correct size.

Keywords: asymmetric price transmission; bootstrap; MTAR; residual-based; SETAR; threshold cointegration (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2019
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