Cointegration Tests Under Multiple Regime Shifts: An Application to the Stock Price-Dividend Relationship

Vasco Gabriel and Luis Martins

No 28/2010, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: We examine the properties of several residual-based cointegration tests when long run parameters are subject to multiple shifts driven by an unobservable Markov process. Unlike earlier work, which considered one-off deterministic breaks, our approach has the advantage of allowing for an unspecified number of stochastic breaks. We illustrate this issue by exploring the possibility of Markov switching cointegration in the stock-price dividend relationship and showing that this case is empirically relevant. Our subsequent Monte Carlo analysis reveals that standard cointegration tests are generally reliable, their performance often being robust for a number of plausible regime shift parameterizations.

Keywords: Present value model; Cointegration tests; Markov switching. (search for similar items in EconPapers)
JEL-codes: C32 E44 G12 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ecm
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Related works:
Journal Article: Cointegration tests under multiple regime shifts: An application to the stock price–dividend relationship (2011)
Working Paper: Cointegration Tests under Multiple Regime Shifts: An Application to the Stock Price-Dividend Relationship (2010)
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