A Residual-Based Test for Stochastic Cointegration

22 Pages Posted: 14 Jun 2006

See all articles by Brendan P.M. McCabe

Brendan P.M. McCabe

University of Liverpool - Management School (ULMS)

Stephen J. Leybourne

University of Nottingham

David Harris

University of Melbourne - Department of Economics

Date Written: May 2006

Abstract

We consider the problem of hypothesis testing in a modified version of the stochastic integration and cointegration framework of Harris, McCabe and Leybourne (2002). This nonlinear setup allows for volatility in excess of that catered for by the standard integration/cointegration paradigm through the introduction of nonstationary heteroscedasticity. We propose a test for stochastic cointegration against the alternative of no cointegration and a secondary test for stationary cointegration against the heteroscedastic alternative. Asymptotic distributions of these tests under their respective null hypotheses are derived and consistency under their respective alternatives is established. Monte Carlo evidence suggests the tests will perform well in practice. An empirical application to the term structure of interest rates is also given.

JEL Classification: C12, C22

Suggested Citation

McCabe, Brendan P.M. and Leybourne, Stephen J. and Harris, David, A Residual-Based Test for Stochastic Cointegration (May 2006). Available at SSRN: https://ssrn.com/abstract=908478 or http://dx.doi.org/10.2139/ssrn.908478

Brendan P.M. McCabe

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Stephen J. Leybourne

University of Nottingham ( email )

University Park
School of Economics
Nottingham NG7 2RD
United Kingdom
+44 (0)115 9515478 (Phone)
+44 (0)115 951 4159 (Fax)

David Harris (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

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