WAVELET VARIANCE RATIO TEST AND WAVESTRAPPING FOR THE DETERMINATION OF THE COINTEGRATION RANK
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Burak Eroglu: Istanbul Bilgi University
Working Papers from The Center for Financial Studies (CEFIS), Istanbul Bilgi University
In this paper, I propose a wavelet based cointegration test for fractionally integrated time series. This proposed test is non-parametric and asymptotically invariant to different forms of short run dynamics. The use of wavelets allows one to take advantage of the wavelet based bootstrapping method particularly known as wavestrapping. In this regard, I introduce a new wavestrapping algorithm for multivariate time series processes, specifically for cointegration tests. The Monte Carlo simulations indicate that this new wavestrapping procedure can alleviate the severe size distortions which are generally observed in cointegration tests with time series containing innovations that possess highly negative MA parameters. Additionally, I apply the proposed methodology to analyse the long run co-movements in the credit default swap market of European Union countries.
Keywords: Fractional integration; Cointegration; Wavelet; Wavestrapping (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:bli:wpaper:1706
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