A simple approach to robust inference in a cointegrating system

Jonathan Wright

No 654, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Cointegration requires all the variables in the system to have exact unit roots; accordingly it is conventional for researchers to test for a unit root in each variable prior to a cointegration analysis. Unfortunately, these unit root tests are not powerful. Meanwhile, conventional cointegration methods are not at all robust to slight violations of the requirement that each variable have a unit root. In this paper I show how this difficulty may be circumvented by instrumenting the regressors in the cointegrating regression by deterministic polynomial time trends or by artificially generated random walks.

Keywords: Cointegration; Statistics (search for similar items in EconPapers)
Date: 1999
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