Co-integration Rank Testing under Conditional Heteroskedasticity

Giuseppe Cavaliere, Anders Rahbek and Robert Taylor

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We analyse the properties of the conventional Gaussian-based co-integrating rank tests of Johansen (1996) in the case where the vector of series under test is driven by globally stationary, conditionally heteroskedastic (martingale difference) innovations. We first demonstrate that the limiting null distributions of the rank statistics coincide with those derived by previous authors who assume either i.i.d. or (strict and covariance) stationary martingale difference innovations. We then propose wild bootstrap implementations of the co-integrating rank tests and demonstrate that the associated bootstrap rank statistics replicate the first-order asymptotic null distributions of the rank statistics. We show the same is also true of the corresponding rank tests based on the i.i.d. bootstrap of Swensen (2006). The wild bootstrap, however, has the important property that, unlike the i.i.d. bootstrap, it preserves in the re-sampled data the pattern of heteroskedasticity present in the original shocks. Consistent with this, numerical evidence suggests that, relative to tests based on the asymptotic critical values or the i.i.d. bootstrap, the wild bootstrap rank tests perform very well in small samples under a variety of conditionally heteroskedastic innovation processes. An empirical application to the term structure of interest rates is given.

Keywords: Co-integration; trace and maximum eigenvalue rank tests; conditional heteroskedasticity; i.i.d. bootstrap; wild bootstrap (search for similar items in EconPapers)
JEL-codes: C30 C32 (search for similar items in EconPapers)
Pages: antal sider 46
Date: 2009-05-28
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: COINTEGRATION RANK TESTING UNDER CONDITIONAL HETEROSKEDASTICITY (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2009-22

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