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Testing for cointegration using the Johansen approach: Are we using the correct critical values?

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  • Paul Turner

    (Dept of Economics, Loughborough University)

Abstract

This paper presents Monte Carlo simulations for the Johansen cointegration test which indicate that the critical values applied in a number of econometrics software packages are inappropriate. This is due to a confusion in the specification of the deterministic terms included in the VECM between the cases considered by Osterwald-Lenum (1992) and Pesaran, Shin and Smith (2000). The result is a tendency to reject the null of no cointegration too often. However, a simple adjustment of the critical values is enough to deal with the problem.

Suggested Citation

  • Paul Turner, 2007. "Testing for cointegration using the Johansen approach: Are we using the correct critical values?," Discussion Paper Series 2007_12, Department of Economics, Loughborough University, revised May 2007.
    • Handle: RePEc:lbo:lbowps:2007_12
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    File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Turner_Johansen_Simulations_May_2007.pdf
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    References listed on IDEAS

    as
    1. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
    2. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
    3. Jurgen A. Doornik, 1998. "Approximations To The Asymptotic Distributions Of Cointegration Tests," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 573-593, December.
    4. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
    5. repec:bla:jecsur:v:12:y:1998:i:5:p:573-93 is not listed on IDEAS
    6. 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:

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    2. Fulgence Dominick Waryoba, 2018. "Yuan Revaluation and China’s External Trade Performance," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 4(2), pages 112-119, June.
    3. Solarin, Sakiru Adebola & Shahbaz, Muhammad, 2013. "Trivariate causality between economic growth, urbanisation and electricity consumption in Angola: Cointegration and causality analysis," Energy Policy, Elsevier, vol. 60(C), pages 876-884.
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    5. Sakiru Adebola Solarin, 2017. "The Role of Urbanisation in the Economic Development Process: Evidence from Nigeria," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 11(3), pages 223-255, August.
    6. Grabowski, Wojciech & Welfe, Aleksander, 2020. "The Tobit cointegrated vector autoregressive model: An application to the currency market," Economic Modelling, Elsevier, vol. 89(C), pages 88-100.

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    More about this item

    Keywords

    Cointegration; Johansen Test.;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: 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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