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Testing for cointegration in I(1) state space systems via a finite order approximation

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  • Franchi, Massimo

Abstract

The present paper employs the infinite order error correction representation of the observables of a I(1) state space system and analyzes by simulation the small sample behaviour of the test on rank and on the cointegrating vectors calculated via a finite order cointegrated vector autoregressive approximation. The rank test performs very well in systems with a small number of states and stochastic trends (≤4) and a medium number of observables (≤35) already for a sample of size T=300 and it is still reliable with a large number of observables (≤140) when T=600. The behaviour of the test on the cointegrating vectors is more problematic.

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  • Franchi, Massimo, 2018. "Testing for cointegration in I(1) state space systems via a finite order approximation," Economics Letters, Elsevier, vol. 165(C), pages 73-76.
    • Handle: RePEc:eee:ecolet:v:165:y:2018:i:c:p:73-76
    DOI: 10.1016/j.econlet.2018.02.012
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