THE POWER OF SINGLE EQUATION TESTS FOR COINTEGRATION WHEN THE COINTEGRATING VECTOR IS PRESPECIFIED

Eric Zivot
2000 Econometric Theory  
In this paper I present an alternative derivation of the asymptotic distribution of Kremers, Ericsson and Dolado's (1992) conditional ECM based t-test for cointegration with a single prespecified cointegrating vector. This alternative distribution, which is identical to the distribution of Hansen's (1995) covariate augmented t-test for a unit root, is valid for weakly exogenous regressors and depends on a consistently estimable nuisance parameter that takes on values in the unit interval. I
more » ... nit interval. I show analytically, using asymptotic power functions based on near-cointegrated alternatives, that the ECM t-test with a prespecified cointegrating vector can have much higher power than single equation tests for cointegration based on estimating the cointegrating vector. I also characterize situations in which the ECM t-test computed with a misspecified cointegrating vector will have high power. JEL CLASSIFICATIONS: C22, C51.
doi:10.1017/s0266466600163054 fatcat:bkjiiwo7p5cjrf6d7mml45u2em