The power of bootstrap tests of cointegration rank

Niklas Ahlgren () and Jan Antell

Computational Statistics, 2013, vol. 28, issue 6, 2719-2748

Abstract: Bootstrap likelihood ratio tests of cointegration rank are commonly used because they tend to have rejection probabilities that are closer to the nominal level than the rejection probabilities of asymptotic tests. The effect of bootstrapping the test on its power is largely unknown. We show that a new computationally inexpensive procedure can be applied to the estimation of the power function of the bootstrap test of cointegration rank. The bootstrap test is found to have a power function close to that of the level-adjusted asymptotic test. The bootstrap test therefore estimates the level-adjusted power of the asymptotic test highly accurately. The bootstrap test may have low power to reject the null hypothesis of cointegration rank zero, or underestimate the cointegration rank. An empirical application to Euribor interest rates is provided as an illustration of the findings. Copyright Springer-Verlag Berlin Heidelberg 2013

Keywords: Bootstrap; Cointegration; Euribor interest rates; Likelihood ratio test; Test power (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:spr:compst:v:28:y:2013:i:6:p:2719-2748

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DOI: 10.1007/s00180-013-0425-6

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