Testing Structural Hypotheses on Cointegration Relations with Small Samples

Su Zhou

Economic Inquiry, 2000, vol. 38, issue 4, 629-40

Abstract: This study examines the finite-sample bias of Johansen's [1991] likelihood ratio tests for structural hypotheses on cointegration relations among economic variables through the Monte Carlo experiments. It is found that the Johansen tests with small samples are biased toward rejecting the null hypotheses more often than what asymptotic theory suggests, even after the test statistics are adjusted by Sim's correction. A bootstrap method for obtaining problem-specific critical values for the tests is proposed. It is shown that using the bootstrap procedure may substantially reduce the small-sample bias. An empirical application of the procedure is demonstrated. Copyright 2000 by Oxford University Press.

Date: 2000
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