SSE/EFI Working Paper Series in Economics and Finance
No 439:
Size and power of the likelihood ratio test for seasonal cointegration in small samples: A Monte Carlo study
Mårten Löf ()
Abstract: This paper investigates the small sample size and power
properties of the likelihood ratio test in the seasonal error correction
model. Two specifications of the model at the annual frequency are
analyzed. One is more restricted (RS), designed for the particular case of
'synchronous cointegration', whereas the other specification is general
(GS). The results indicate that RS has poor size properties in cases where
non-synchronous cointegration clearly should play a role. There is a risk
of finding 'evidence' of too many cointegrating vectors at the annual
frequency when using RS. On the other hand, if the restriction is almost
satisfied, the general specification looses power at least for small sample
sizes, while tests in RS have good properties. The number of true
cointegration relations at one certain frequency affect the test for the
rank at other frequencies in small samples. This result suggests a possible
gain in efficiency when testing at a certain frequency, by concentrating
out the 'correct' number of vectors at the other frequencies.
Keywords: Likelihood ratio; Seasonal cointegration; (follow links to similar papers)
JEL-Codes: C12; C15; C32; (follow links to similar papers)
23 pages, March 15, 2001
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