Scandinavian Working Papers in Economics

Working Papers,
Hanken School of Economics

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

Niklas Ahlgren () and Jukka Nyblom ()
Additional contact information
Niklas Ahlgren: Swedish School of Economics and Business Administration, Postal: Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland
Jukka Nyblom: University of Joensuu, Postal: P.O. Box 111; FIN 80101 Joensuu , Finland

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

38 pages, December 14, 2005

Price: 10

Note: 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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