The power of cointegration tests

Jeroen J.M. Kremers, Neil R. Ericsson () and Juan J. Dolado

No 431, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: A cointegration test statistic based upon estimation of an error cor­rection model can be approximately normally distributed when no cointegration is present. By contrast, the equivalent Dickey-Fuller statistic applied to residuals from a static relationship has a non-standard asymptotic distribution. When cointegration exists, the error-correction test generally is more powerful than the Dickey-Fuller test. These differences arise because the latter imposes a possibly invalid common factor restriction. The issue is general and has ramifications for system-based cointegration tests. Monte Carlo analysis and an empirical study of U.K. money demand demonstrate the differences in power.

Keywords: Econometrics (search for similar items in EconPapers)
Date: 1992
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Journal Article: The Power of Cointegration Tests (1992)
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