Document Type
Discussion Paper
Publication Date
3-1-2003
CFDP Number
1404
CFDP Pages
55
Abstract
This paper introduces tests for cointegration breakdown that may occur over a relatively short time period, such as at the end of the sample. The breakdown may be due to a shift in the cointegrating vector or due to a shift in the errors from being I (0) to being I (1). Tests are introduced based on the post-breakdown sum of squared residuals and the post-breakdown sum of squared reverse partial sums of residuals. Critical values are provided using a parametric subsampling method. The regressors in the model are taken to be arbitrary linear combinations of deterministic, stationary, and integrated random variables. The tests are asymptotically valid when the number of observations in the breakdown period, m , is fixed and finite as the total sample size, T + m , goes to infinity. The tests are asymptotically valid under weak conditions. Simulation results indicate that the tests work well in the scenarios considered. Use of the tests is illustrated by testing for interest rate parity breakdown during the Asian financial crisis of 1997.
Recommended Citation
Andrews, Donald W.K. and Kim, Jae-Young, "End-of-Sample Cointegration Breakdown Tests" (2003). Cowles Foundation Discussion Papers. 1672.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1672