SSE/EFI Working Paper Series in Economics and Finance
Detecting equilibrium correction with smoothly time-varying strength
Abstract: Simulations are used to check the probability of detecting
a time-varying equilibrium correction by applying the existing tests of no
cointegration and parameter constancy. Smooth transition regressions are
chosen to describe the nonlinearity and the Johansen cointegration test and
the Lin and Teräsvirta parameter constancy test are applied. It turns out
that both tests perform well separately but the joint power is quite low.
The most notable result of this study is the high power when dealing with
unrestricted cointegration, that is, when no cointegrating vector is
estimated and the cointegrated variables freely enter the model in levels.
The power of the parameter constancy test for the unrestricted
cointegration is close to the power when the cointegrating vector is
assumed to be known.
Keywords: Time-varying equilibrium correction; cointegration; parameter constancy; smooth transition regression; (follow links to similar papers)
JEL-Codes: C15; C50; (follow links to similar papers)
28 pages, September 8, 1999
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