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Testing for fractional cointegration in subsamples by allowing for structural breaks

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  • Kreye, Tom Jannik

Abstract

In this paper, tests for fractional cointegration that allow for structural breaks in the long-run equilibrium are proposed. Traditional cointegration tests cannot handle shifts in fractional cointegration relationships, a limitation addressed here by allowing for a time-dependent memory parameter for the cointegration error. The tests are implemented by taking the extremum of a residual-based fractional cointegration test applied to different subsamples of the data. The subsampling procedures include sample splits, incremental samples, and rolling samples. A fairly general cointegration model is assumed, where the observed series and the cointegration error are fractionally integrated processes. Under the alternative hypothesis, the tests converge to the supremum of a chi-squared distribution. A Monte Carlo simulation is used to evaluate the finite sample performance of the tests.

Suggested Citation

  • Kreye, Tom Jannik, 2024. "Testing for fractional cointegration in subsamples by allowing for structural breaks," Hannover Economic Papers (HEP) dp-733, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    • Handle: RePEc:han:dpaper:dp-733
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    More about this item

    Keywords

    Fractional Cointegration; Long Memory; Monte Carlo; Persistence Breaks; Structural Breaks; Subsample Analysis;
    All these keywords.

    JEL classification:

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