Testing for cointegration using the Johansen methodology when variables are near-integrated

Erik Hjalmarsson and Pär Österholm

No 915, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate the properties of Johansen's (1988, 1991) maximum eigenvalue and trace tests for cointegration under the empirically relevant situation of near-integrated variables. Using Monte Carlo techniques, we show that in a system with near-integrated variables, the probability of reaching an erroneous conclusion regarding the cointegrating rank of the system is generally substantially higher than the nominal size. The risk of concluding that completely unrelated series are cointegrated is therefore non-negligible. The spurious rejection rate can be reduced by performing additional tests of restrictions on the cointegrating vector(s), although it is still substantially larger than the nominal size.

Keywords: Statistical methods; Cointegration (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ecm and nep-ets
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Related works:
Journal Article: Testing for cointegration using the Johansen methodology when variables are near-integrated: size distortions and partial remedies (2010)
Working Paper: Testing for Cointegration Using the Johansen Methodology when Variables are Near-Integrated (2007)
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