Scandinavian Working Papers in Economics

Working Papers,
Hanken School of Economics

No 541: The Power of Bootstrap Tests of Cointegration Rank with Financial Time Series

Niklas Ahlgren () and Jan Antell ()
Additional contact information
Niklas Ahlgren: Hanken School of Economics, Postal: Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland
Jan Antell: Hanken School of Economics, Postal: P.O.B. 479; FIN 00101 Helsinki, Finland

Abstract: Bootstrap likelihood ratio tests of cointegration rank are commonly used because they tend to have rejection probabilities that are closer to the nominal level than the rejection probabilities of the correspond- ing asymptotic tests. The e¤ect of bootstrapping the test on its power is largely unknown. We show that a new computationally inexpensive procedure can be applied to the estimation of the power function of the bootstrap test of cointegration rank. The bootstrap test is found to have a power function close to that of the level-adjusted asymp- totic test. The bootstrap test estimates the level-adjusted power of the asymptotic test highly accurately. The bootstrap test may have low power to reject the null hypothesis of cointegration rank zero, or underestimate the cointegration rank. An empirical application to Euribor interest rates is provided as an illustration of the findings.

Keywords: Cointegration; Likelihood ratio test; Test power; Bootstrap

43 pages, June 11, 2009

Price: 10

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541-978-952-232-039-1.pdf PDF-file 

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