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This paper develops an asymptotic theory for residual based tests for cointegration. These tests involve procedures that are designed to detect the presence of a unit root in the residuals of (cointegrating) regressions among the levels of economic time series. Attention is given to the augmented Dickey-Fuller (ADF) test that is recommended by Engle-Granger (1987) and the Z(a) and Z(t) unit root tests recently proposed by Phillips (1987). TWo new tests are also introduced, one of which is invariant to the normalization of the cointegrating regression. All of these tests are shown to be asymptotically similar and simple representations of their limiting distributions are given in terms of standard Brownian motion. The ADF and Z(t) tests are asymptotically equivalent. Power properties of the tests are also studied. The analysis shows that all the tests are consistent if suitably constructed but that the ADF and Z(t) tests have slower rates of divergence under cointegration than the other tests. This indicates that, at least in large samples, the Z(a) test should have superior power properties.
Phillips, Peter C.B. and Ouliaris, Sam, "Asymptotic Properties of Residual Based Tests for Cointegration" (1987). Cowles Foundation Discussion Papers. 1090.