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More powerful threshold cointegration tests

Author

Listed:
  • Dong-Yop Oh

    (University of Texas Rio Grande Valley)

  • Hyejin Lee

    (University of Texas Rio Grande Valley)

  • Ming Meng

    (Fifth Third Bank)

Abstract

Threshold cointegration tests have made a big splash in the literature by allowing for asymmetric adjustment in linear cointegration tests. This paper contributes to this literature by proposing new tests to improve the power of the conventional threshold cointegration tests. The new tests intuitively resolve one of the possible reasons that attribute to the low power of existing threshold cointegration tests and are easy to implement since they do not require any additional information outside of the system. Our simulation results show that the proposed tests improve the power of the existing threshold cointegration tests, especially as the signal-to-noise ratio increases, in contrast to other considered procedures. The efficiency gains are achieved regardless of sample size, the number of cointegrated variables, and the types of threshold specifications. The newly developed tests are applied to examine long-run purchasing power parity in the Pacific nations. In contrast to conventional cointegration tests, the proposed tests found long-run PPP holds in 5 out of 7 countries with appropriate asymmetric adjustments.

Suggested Citation

  • Dong-Yop Oh & Hyejin Lee & Ming Meng, 2018. "More powerful threshold cointegration tests," Empirical Economics, Springer, vol. 54(3), pages 887-911, May.
    • Handle: RePEc:spr:empeco:v:54:y:2018:i:3:d:10.1007_s00181-017-1243-4
    DOI: 10.1007/s00181-017-1243-4
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    References listed on IDEAS

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    1. Frederic Bec & Melika Ben Salem & Marine Carrasco, 2004. "Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 382-395, October.
    2. Million, Nicolas, 2004. "Central Bank's interventions and the Fisher hypothesis: a threshold cointegration investigation," Economic Modelling, Elsevier, vol. 21(6), pages 1051-1064, December.
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    5. Siklos, Pierre L., 2002. "Asymmetric adjustment from structural booms and slumps," Economics Letters, Elsevier, vol. 77(3), pages 329-333, November.
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    Cited by:

    1. Zhibai Zhang & Zhicun Bian & Minghua Zhan, 2022. "Is absolute purchasing power parity special for Spain?," Empirical Economics, Springer, vol. 62(2), pages 513-531, February.

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    More about this item

    Keywords

    Cointegration; Efficient estimation; Stationary covariates; Asymmetric adjustment; PPP;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: 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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