What results can we expect from rolling trace tests? A discussion based on the issue of stock market integration

Alexander Ludwig

Economics Bulletin, 2014, vol. 34, issue 1, 16-24

Abstract: This paper discusses pitfalls in the application of the rolling trace test. This procedure is based on the iterative calculation of Johansen's (1988) trace test for the rank of a cointegration system in windows of equal length that roll over the sample. Pitfalls lie in the selection of the window length and of the lag order for short-run coefficients as well as in the presence of stationary variables in some sub-periods. We give practical recommendations to solve these issues and demonstrate their implications when assessing the integration of four major European stock markets.

Keywords: rolling cointegration; rolling trace test; rolling unit root test; lag selection; window selection; stock market integration (search for similar items in EconPapers)
JEL-codes: C2 C5 (search for similar items in EconPapers)
Date: 2014-01-06
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