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Spurious Cointegration: The Engle-Granger Test in the Presence of Structural Breaks

Antonio Noriega () and Daniel Ventosa-Santaulària ()

No 2006-12, Working Papers from Banco de México

Abstract: This paper analyses the asymptotic behavior of the Engle-Granger t-test for cointegration when the data include structural breaks, instead of being pure I(1) processes. We find that the test does not possess a limiting distribution, but diverges as the sample size tends to infinity. Calculations involving the asymptotic expression of the t-test , as well as Monte Carlo simulations, reveal that the test can diverge in either direction, making it unreliable as a test for cointegration, when there are neglected breaks in the trend function of the data. Using real data on car sales and murders in the US, we present an empirical illustration of the theoretical results.

Keywords: Spurious cointegration; structural breaks; integrated processes (search for similar items in EconPapers)
JEL-codes: C12 C13 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2006-12
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