Testing linear cointegration against smooth-transition cointegration
2011 (English)Report (Other academic)
This paper studies a smooth-transition (ST) type cointegration. The proposed ST cointegration allows for regime switching structure in a cointegrated system. It nests the linear cointegration developed by Engle and Granger (1987) and the threshold cointegration studied by Balke and Fomby (1997). We develop F-type tests to examine linear cointegration against ST cointegration in ST-type cointegrating regression models with or without time trends. The null asymptotic distributions of the tests are derived with stationary transition variables in ST cointegrating regression models. And it is shown that our tests have nonstandard limiting distributions expressed in terms of standard Brownian motion when regressors are pure random walks, while have standard asymptotic distributions when regressors contain random walks with nonzero drift. Finite-sample distributions of those tests are studied by Monto Carlo simulations. The small-sample performance of the tests states that our F-type tests have a better power when the system contains ST cointegration than when the system is linearly cointegrated. An empirical example for the purchasing power parity (PPP) data (monthly US dollar, Italy lira and dollar-lira exchange rate from 1973:01 to 1989:10) is illustrated by applying the testing procedures in this paper. It is found that there is no linear cointegration in the system, but there exits the ST-type cointegration in the PPP data.
Place, publisher, year, edition, pages
Borlänge: Högskolan Dalarna , 2011.
Working papers in transport, tourism, information technology and microdata analysis, ISSN 1650-5581 ; 2011:01
cointegration; smooth transition; F-type test; purchasing power parity.
Probability Theory and Statistics
Research subject Komplexa system - mikrodataanalys, Nonlinear Cointegration i Nonlinear Vector autoregressive modeller: teori och tillämpningar
IdentifiersURN: urn:nbn:se:du-6042OAI: oai:dalea.du.se:6042DiVA: diva2:520481