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A simple approach to robust inference in a cointegrating system

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Abstract

Cointegration requires all the variables in the system to have exact unit roots; accordingly it is conventional for researchers to test for a unit root in each variable prior to a cointegration analysis. Unfortunately, these unit root tests are not powerful. Meanwhile, conventional cointegration methods are not at all robust to slight violations of the requirement that each variable have a unit root. In this paper I show how this difficulty may be circumvented by instrumenting the regressors in the cointegrating regression by deterministic polynomial time trends or by artificially generated random walks.

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  • Jonathan H. Wright, 1999. "A simple approach to robust inference in a cointegrating system," International Finance Discussion Papers 654, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:654
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    Cited by:

    1. Michael Jansson & Marcelo J. Moreira, 2006. "Optimal Inference in Regression Models with Nearly Integrated Regressors," Econometrica, Econometric Society, vol. 74(3), pages 681-714, May.

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    Cointegration; Statistics;

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