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The Effect of Linear Time Trends on Cointegration Testing in Single Equations

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  • Hassler, Uwe

Abstract

This paper surveys the asymptotic distributions of three widely used single equation cointegration tests. Particular attention is paid to the case where the regressors are integrated with drift, i.e. at least one of the regressors follows a linear trend. Even if the regressions are not detrended, the asymptotic critical values are affected by the presence of linear trends in the regressors. Not taking into account this effect leads to tests that are biased towards establishing cointegration too often. The correct limiting distribution theory of regressions without detrending in the presence of integrated regressors with drift is described. Appropriate critical values are readily available from the literature and are simple to use following the tables included here.

Suggested Citation

  • Hassler, Uwe, 2002. "The Effect of Linear Time Trends on Cointegration Testing in Single Equations," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 37698, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:37698
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/37698/
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    References listed on IDEAS

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    1. Park, Joon Y, 1992. "Canonical Cointegrating Regressions," Econometrica, Econometric Society, vol. 60(1), pages 119-143, January.
    2. Uwe Hassler, 2001. "The Effect of Linear Time Trends on the KPSS Test for Cointegration," Journal of Time Series Analysis, Wiley Blackwell, vol. 22(3), pages 283-292, May.
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    8. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
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    10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    Cited by:

    1. Vishal Jaunky, 2013. "Democracy and economic growth in Sub-Saharan Africa: a panel data approach," Empirical Economics, Springer, vol. 45(2), pages 987-1008, October.

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