Paper #1439

Title:

A residual-based ADF test for stationary cointegration in I (2) settings

Authors:

Javier Gómez Biscarri and Javier Hualde

Date:

September 2014

Abstract:

We propose a residual-based augmented Dickey-Fuller (ADF) test statistic that allows for detection of stationary cointegration within a system that may contain both I (2) and I (1) observables. The test is also consistent under the alternative of multicointegration, where first differences of the I (2) observables enter the cointegrating relationships. We find the null limiting distribution of this statistic and justify why our proposal improves over related approaches. Critical values are computed for a variety of situations. Additionally, building on this ADF test statistic, we propose a procedure to test the null of no stationary cointegration which overcomes the drawback, suffered by any residual-based method, of the lack of power with respect to some relevant alternatives. Finally, a Monte Carlo experiment is carried out and an empirical application is provided as an illustrative example.

Keywords:

I(2) systems; stationary cointegration; multicointegration; residual-based tests.

JEL codes:

C12, C22, C32.

Area of Research:

Finance and Accounting / Macroeconomics and International Economics / Statistics, Econometrics and Quantitative Methods

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