Monitoring Stationarity and Cointegration

Martin Wagner and Dominik Wied

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: We propose a monitoring procedure to detect a structural change from stationary to integrated behavior. When the procedure is applied to the errors of a relationship between integrated series it thus monitors a structural change from a cointegrating relationship to a spurious regression. The cointegration monitoring procedure is based on residuals from modified least squares estimation, using either Fully Modified, Dynamic or Integrated Modified OLS. The procedure is inspired by Chu et al. (1996) in that it is based on parameter estimation only on a pre-break ``calibration'' period rather than being based on sequential estimation over the full sample. We investigate the asymptotic behavior of the procedures under the null, for (fixed and local) alternatives and in case of parameter changes. We also study the finite sample performance via simulations. An application to credit default swap spreads illustrates the potential usefulness of the procedure.

JEL-codes: C22 C32 C52 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100386

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