Testing for the cointegrating rank of a VAR process with level shift and trend break

Carsten Trenkler, Pentti Saikkonen and Helmut Lütkepohl

No 2006-067, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: A test for the cointegrating rank of a vector autoregressive (VAR) process with a possible shift and broken linear trend is proposed. The break point is assumed to be known. The setup is a VAR process for cointegrated variables. The tests are not likelihood ratio tests but the deterministic terms including the broken trends are removed first by a GLS procedure and a likelihood ratio type test is applied to the adjusted series. The asymptotic null distribution of the test is derived and it is shown by a Monte Carlo experiment that the test has better small sample properties in many cases than a corresponding Gaussian likelihood ratio test for the cointegrating rank.

Keywords: Cointegration; structural break; vector autoregressive process; error correction model (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
Date: 2006
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Related works:
Journal Article: Testing for the Cointegrating Rank of a VAR Process with Level Shift and Trend Break (2008)
Working Paper: Testing for the Cointegrating Rank of a VAR Process with Level Shift and Trend Break (2006)
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