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The effect of structural breaks on the Engle-Granger test for cointegration

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  • Antonio E. Noriega

    (Banco de México and Universidad de Guanajuato)

  • Daniel Ventosa-Santaularia

    (Universidad de Guanajuato)

Abstract

This paper extends Gonzalo and Lee's (1998) results by studying the asymptotic and finite sample behavior of the Engle-Granger test for cointegration, under misspecification of the trend function in the form of neglected structural breaks. We allow breaks in level and slope of trend in both dependent and explanatory variables. We also allow these processes to interact with I (1) processes without breaks. In some cases, breaks bias the EG test towards both rejecting a true cointegration relation, and not rejecting a non-existent one. Using real data, we present an empirical illustration of the theoretical results.

Suggested Citation

  • Antonio E. Noriega & Daniel Ventosa-Santaularia, 2012. "The effect of structural breaks on the Engle-Granger test for cointegration," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 27(1), pages 99-132.
    • Handle: RePEc:emx:esteco:v:27:y:2012:i:1:p:99-132
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    File URL: https://estudioseconomicos.colmex.mx/index.php/economicos/article/view/94/96
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    References listed on IDEAS

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    More about this item

    Keywords

    cointegration; structural breaks; integrated processes; Engle-Granger test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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