Residual test for cointegration with GLS detrended data

Pierre Perron and Gabriel Rodríguez

No 2012-327, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: We analyze di¤erent residual-based tests for the null of no cointegration using GLS detrended data. We nd and simulate the limiting distributions of these statistics when GLS demeaned and GLS detrended data are used. The distributions depend of the number of right-hand side variables, the type of deterministic components used in the cointegration equation, and a nuisance parameter R2 which measures the long-run correlation between xt and yt. We present an extensive number of Figures which show the asymptotic power functions of the di¤erent statistics analyzed in this paper. The results show that GLS allows to obtain more asymptotic power in comparison with OLS detrending. The more simple residual-based tests (as the ADF) shows power gains for small values of R2 and for only one right-hand side variable. This evidence is valid for R2 less than 0.4. Figures shows that when R2 is larger, the ECR statistics are better for any value of the right-hand side variables. In particular, evidence shows that the ECR statistic which assumes a known cointegration vector is the most powerful. A set of simulated asymptotic critical values are also presented. Unlike other references, in the present framework we use di¤erent c for di¤erent number of right-hand side variables (xt variables) and according to the set of deterministic components. In this selection, we use a R2 = 0:4, which appears to be a sensible choice.

Keywords: Cointegration; Residual-Based Unit Root Test; ECR Test; OLS and GLS Detrented Data; Hypothesis Testing (search for similar items in EconPapers)
JEL-codes: C2 C3 C5 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2012
New Economics Papers: this item is included in nep-ecm and nep-ets
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