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A Test of Cointegration Rank Based on Principal Component Analysis (revised, January 2006)

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  • Hiroaki Chigira

Abstract

This paper considers a test of the rank of cointegration. The test is based on the fact that in an m-variate system the m-r th principal component is I (1) under the null of r cointegration rank but I (0) under the alternative of r+1 cointegration rank. Exploiting this fact, we construct a cointegration rank test that is less restrictive than Johansen's tests, easy to calculate, and independent of the dimension of the process. Monte Carlo simulations indicate that the proposed test outperforms Johansen's tests, even in the case of a model that satisfies the assumptions required for Johansen's tests and when the sample size is small.

Suggested Citation

  • Hiroaki Chigira, 2005. "A Test of Cointegration Rank Based on Principal Component Analysis (revised, January 2006)," Hi-Stat Discussion Paper Series d05-126, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hst:hstdps:d05-126
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    More about this item

    Keywords

    Cointegratin test; Unit roots;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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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