Testing for Co-integration in Vector Autoregressions with Non-Stationary Volatility

Giuseppe Cavaliere, Anders Rahbek and Robert Taylor

No 08-34, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: Many key macro-economic and ?nancial variables are characterised by permanent changes in unconditional volatility. In this paper we analyse vector autoregressions with non-stationary (unconditional) volatility of a very general form, which includes single and multiple volatility breaks as special cases. We show that the conventional rank statistics computed as in Johansen (1988,1991) are potentially unreliable. In particular, their large sample distributions depend on the integrated covariation of the underlying multivariate volatility process which impacts on both the size and power of the associated co-integration tests, as we demonstrate numerically. A solution to the identi?ed inference problem is provided by considering wild bootstrap-based implementations of the rank tests. These do not require the practitioner to specify a parametric model for volatility, nor to assume that the pattern of volatility is common to, or independent across, the vector of series under analysis. The bootstrap is shown to perform very well in practice.

Keywords: co-integration; non-stationary volatility; trace and maximum eigenvalue tests; wild bootstrap (search for similar items in EconPapers)
JEL-codes: C30 C32 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2008-09
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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http://www.econ.ku.dk/english/research/publications/wp/2008/0834.pdf (application/pdf)

Related works:
Journal Article: Testing for co-integration in vector autoregressions with non-stationary volatility (2010)
Working Paper: Testing for Co-integration in Vector Autoregressions with Non-Stationary Volatility (2008)
Working Paper: Testing for co-integration in vector autoregressions with non-stationary volatility (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0834

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