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The effect of structural breaks on the Engle-Granger test for cointegration

Antonio Noriega () and Daniel Ventosa-Santaulària ()

Estudios Económicos, 2012, vol. 27, issue 1, 99-132

Abstract: This paper extends Gonzalo and Lee's (1998) results by studying the asymptotic and finite sample behavior of the Engle-Granger test for cointegration, under misspecification of the trend function in the form of neglected structural breaks. We allow breaks in level and slope of trend in both dependent and explanatory variables. We also allow these processes to interact with I (1) processes without breaks. In some cases, breaks bias the EG test towards both rejecting a true cointegration relation, and not rejecting a non-existent one. Using real data, we present an empirical illustration of the theoretical results.

Keywords: cointegration; structural breaks; integrated processes; Engle-Granger test (search for similar items in EconPapers)
JEL-codes: C12 C13 C22 (search for similar items in EconPapers)
Date: 2012
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