Working Papers, Hanken School of Economics
No 519:
Bootstrap and Fast Double Bootstrap Tests of Cointegration Rank with Financial Time Series
Niklas Ahlgren ()
and Jan Antell ()
Abstract: The likelihood ratio test of cointegration rank is the
most widely used test for cointegration. Many studies have shown that its
finite sample distribution is not well approximated by the limiting
distribution. The article introduces and evaluates by Monte Carlo
simulation experiments bootstrap and fast double bootstrap (FDB) algorithms
for the likelihood ratio test. It finds that the performance of the
bootstrap test is very good. The more sophisticated FDB produces a further
improvement in cases where the performance of the asymptotic test is very
unsatisfactory and the ordinary bootstrap does not work as well as it
might. Furthermore, the Monte Carlo simulations provide a number of
guidelines on when the bootstrap and FDB tests can be expected to work
well. Finally, the tests are applied to US interest rates and international
stock prices series. It is found that the asymptotic test tends to
overestimate the cointegration rank, while the bootstrap and FDB tests
choose the correct cointegration rank.
Keywords: Bootstrap; Cointegration; Financial time series; Likelihood ratio test; (follow links to similar papers)
40 pages, September 14, 2006
This paper is published as: Ahlgren, Niklas and Antell, Jan (2008), 'Bootstrap and Fast Double Bootstrap Tests of Cointegration Rank with Financial Time Series', Computational Statistics and Data Analysis, 52, 4754-4767.
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