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Hanken School of Economics Working Papers, Hanken School of Economics

No 511:
Tests Against Stationary and Explosive Alternatives in Vector Autoregressive Models

Niklas Ahlgren () and Jukka Nyblom ()

Abstract: The article proposes new tests for the number of unit roots in vector autoregressive models based on the eigenvalues of the companion matrix. Both stationary and explosive alternatives are considered. The limiting distributions of test statistics depend only on the number of unit roots. Size and power are investigated and it is found that the new test against stationary alternatives compares favorably with the widely used likelihood ratio test for the cointegrating rank. The powers are prominently higher against explosive than stationary alternatives. Some empirical examples are provided to show how to use the new tests with real data.

Keywords: Asymptotic local power; Cointegration; Companion matrix; Unit root; (follow links to similar papers)

38 pages, December 14, 2005

This paper is published as: Ahlgren, Niklas and Nyblom, Jukka (2008), 'Tests against Stationary and Explosive Alternatives in Vector Autoregressive Models', Journal of Time Series Analysis, 29, 421-443.

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