A Residual-Based Test for Stochastic Cointegration
22 Pages Posted: 14 Jun 2006
Date Written: May 2006
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: Suggested Citation