More powerful cointegration tests with non-normal errors

Lee Hyejin (), Junsoo Lee () and Im Kyungso
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Lee Hyejin: Department of Economics, Finance, and Legal Studies, University of Alabama, Tuscaloosa, AL 35487, USA
Im Kyungso: Federal deposit Insurance Corporation (FDIC), 550 17th Street, NW, Washington, DC, USA

Studies in Nonlinear Dynamics & Econometrics, 2015, vol. 19, issue 4, 397-413

Abstract: In this paper, we suggest new cointegration tests that can become more powerful in the presence of non-normal errors. Non-normal errors will not pose a problem in usual cointegration tests even when they are ignored. However, we show that they can become useful sources to improve the power of the tests when we use the “residual augmented least squares” (RALS) procedure to make use of nonlinear moment conditions driven by non-normal errors. The suggested testing procedure is easy to implement and it does not require any non-linear estimation techniques. We can exploit the information on the non-normal error distribution that is already available but ignored in the usual cointegration tests. Our simulation results show significant power gains over existing cointegration tests in the presence of non-normal errors.

Keywords: cointegration; non-normal errors; nonlinear processes; RALS (search for similar items in EconPapers)
JEL-codes: C12 C15 C22 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (9)

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DOI: 10.1515/snde-2013-0060

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