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Additional results on the power of unit root and cointegration tests under threshold processes

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  • Michael Pippenger
  • Gregory Goering

Abstract

Recently researchers have begun to develop methods to detect stationarity or cointegration when the underlying error correction process follows a threshold model. In the context of one type of threshold model, Pippenger and Goering found that the power of unit root or cointegration tests decay substantially under many economically relevant parameterization. However, in a recent article Balke and Fomby conclude that linear tests work 'reasonably well when threshold cointegration is present' and based on these findings propose a modelling methodology under threshold cointegration. This study examines the threshold processes they analysed under a wide range of parameterizations and finds that linear unit root and cointegration tests display relatively low power even under large sample sizes. Hence, contrary to Balke and Fomby linear cointegration tests appear to be an inappropriate test under threshold cointegration.

Suggested Citation

  • Michael Pippenger & Gregory Goering, 2000. "Additional results on the power of unit root and cointegration tests under threshold processes," Applied Economics Letters, Taylor & Francis Journals, vol. 7(10), pages 641-644.
    • Handle: RePEc:taf:apeclt:v:7:y:2000:i:10:p:641-644
    DOI: 10.1080/135048500415932
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    References listed on IDEAS

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    1. Richard E. Baldwin, 1990. "Re-Interpreting the Failure of Foreign Exchange Market Efficiency Tests:Small Transaction Costs, Big Hysteresis Bands," NBER Working Papers 3319, National Bureau of Economic Research, Inc.
    2. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-879, August.
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    4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    5. Gregory Goering & Michael Pippenger, 1994. "A note regarding ARCH and threshold processes: results from a Monte Carlo study," Applied Economics Letters, Taylor & Francis Journals, vol. 1(11), pages 210-213.
    6. Pippenger, Michael K & Goering, Gregory E, 1993. "A Note on the Empirical Power of Unit Root Tests under Threshold Processes," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 473-481, November.
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