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Testing for Cointegration in Markov Switching Error Correction Models

In: Essays in Honor of Peter C. B. Phillips

Author

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  • Liang Hu
  • Yongcheol Shin

Abstract

This paper proposes an efficient test designed to have power against alternatives where the error correction term follows a Markov switching dynamics. The adjustment to long run equilibrium is different in different regimes characterised by the hidden state Markov chain process. Using a general nonlinear MS-ECM framework, we propose an optimal test for the null of no cointegration against an alternative of a globally stationary MS cointegration. The Monte Carlo studies demonstrate that our proposed tests display superior powers compared to the linear tests. In an application to price-dividend relationships, our test is able to find cointegration while linear based tests fail to do so.

Suggested Citation

  • Liang Hu & Yongcheol Shin, 2014. "Testing for Cointegration in Markov Switching Error Correction Models," Advances in Econometrics, in: Essays in Honor of Peter C. B. Phillips, volume 33, pages 123-150, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-905320140000033005
    DOI: 10.1108/S0731-905320140000033005
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    Citations

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    Cited by:

    1. Heejoon Han & Na Kyeong Lee, 2018. "Modeling the Dynamics between Stock Price and Dividend: An Endogenous Regime Switching Approach," Korean Economic Review, Korean Economic Association, vol. 34, pages 213-235.
    2. Skrobotov, Anton, 2021. "Structural breaks in cointegration models," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 63, pages 117-141.

    More about this item

    Keywords

    Markov switching error correction models; optimal tests; Monte Carlo simulations; price and dividend; C12; C13; C32;
    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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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