Residual-based tests for cointegration and multiple deterministic structural breaks: A Monte Carlo study

Pre-print, Working paper: The aim of this paper is to study the performance of residual-based tests for cointegration in the presence of multiple deterministic structural breaks via Monte Carlo simulations. We consider the KPSS-type LM tests proposed in Carrion-i-Silvestre and Sansò (2006) and in Bartley, Lee and Strazicich (2001), as well as the Schmidt and Phillips-type LM tests proposed in Westerlund and Edgerton (2007). This exercise allow us to cover a wide set of single-equation cointegration estimators. Monte Carlo experiments reveal a trade-off between size and power distortions across tests and models. KPSS-type tests display large size distortions under multiple breaks scenarios, while Schmidt and Phillips-type tests appear well-sized across all simulations. However, when regressors are endogenous, the former group of tests displays quite high power against the alternative hypothesis, while the latter shows severe low power.

Author(s)

Matteo Mogliani

Date of publication
  • 2010
Keywords JEL
C12 C13 C15 C22
Keywords
  • Cointegration
  • Single-equation
  • Structural breaks
  • Monte Carlo simulations
Internal reference
  • PSE Working Papers n°2010-22
Version
  • 1