By the same authors

Testing for Cointegration in Markov Switching Error Correction Models

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JournalAdvances in Econometrics
DatePublished - 2014
Volume33
Pages (from-to)123-150
Original languageEnglish

Abstract

This paper proposes an efficient test designed to have power against alternatives where the error correction term follows a Markov switching dynamics. The adjustment to long run equilibrium is different in different regimes characterised by the hidden state Markov chain process. Using a general nonlinear MS-ECM framework, we propose an optimal test for the null of no cointegration against an alternative of a globally stationary MS cointegration. The Monte Carlo studies
demonstrate that our proposed tests display superior powers compared to the linear tests. In an application to price-dividend relationships, our test is able to find cointegration while linear based tests fail to do so.

    Research areas

  • Markov switching error correction models; optimal tests; Monte Carlo simulations; price and dividend

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