More powerful threshold cointegration tests

Dong-Yop Oh (), Hyejin Lee () and Ming Meng ()
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Dong-Yop Oh: University of Texas Rio Grande Valley
Hyejin Lee: University of Texas Rio Grande Valley
Ming Meng: Fifth Third Bank

Empirical Economics, 2018, vol. 54, issue 3, No 1, 887-911

Abstract: Abstract Threshold cointegration tests have made a big splash in the literature by allowing for asymmetric adjustment in linear cointegration tests. This paper contributes to this literature by proposing new tests to improve the power of the conventional threshold cointegration tests. The new tests intuitively resolve one of the possible reasons that attribute to the low power of existing threshold cointegration tests and are easy to implement since they do not require any additional information outside of the system. Our simulation results show that the proposed tests improve the power of the existing threshold cointegration tests, especially as the signal-to-noise ratio increases, in contrast to other considered procedures. The efficiency gains are achieved regardless of sample size, the number of cointegrated variables, and the types of threshold specifications. The newly developed tests are applied to examine long-run purchasing power parity in the Pacific nations. In contrast to conventional cointegration tests, the proposed tests found long-run PPP holds in 5 out of 7 countries with appropriate asymmetric adjustments.

Keywords: Cointegration; Efficient estimation; Stationary covariates; Asymmetric adjustment; PPP (search for similar items in EconPapers)
JEL-codes: C12 C15 C22 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00181-017-1243-4

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