Premium
THE POWER OF COINTEGRATION TESTS
Author(s) -
Kremers Jeroen J. M.,
Ericsson Neil R.,
Dolado Juan J.
Publication year - 1992
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.1992.tb00005.x
Subject(s) - cointegration , economics , econometrics
A cointegration test statistic based upon estimation of an error-correction model can be approximately normally distributed when no cointegration is present. By contrast, the equivalent Dickey-Fuller statistic applied to residuals from a static relationship has a nonstandard asymptotic distribution. When cointegration exists, the error-correction test generally is more powerful than the Dickey-Fuller test. These differences arise because the latter imposes a possibly invalid common factor restriction. The issue is general and has ramifications for system-based cointegration tests. Monte Carlo analysis and an empirical study of U.K. money demand demonstrate the differences in power. Copyright 1992 by Blackwell Publishing Ltd