Tests for cointegration with two unknown regime shifts with an application to financial market integration

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    203 Citations (Scopus)

    Abstract

    It is widely agreed in empirical studies that allowing for potential structural change in economic processes is an important issue. In existing literature, tests for cointegration between time series data allow for one regime shift. This paper extends three residual-based test statistics for cointegration to the cases that take into account two possible regime shifts. The timing of each shift is unknown a priori and it is determined endogenously. The distributions of the tests are non-standard. We generate new critical values via simulation methods. The size and power properties of these test statistics are evaluated through Monte Carlo simulations, which show the tests have small size distortions and very good power properties. The test methods introduced in this paper are applied to determine whether the financial markets in the US and the UK are integrated.

    Original languageEnglish
    Pages (from-to)497-505
    Number of pages9
    JournalEmpirical Economics
    Volume35
    Issue number3
    DOIs
    Publication statusPublished - 2008

    Keywords

    • Cointegration
    • Monte Carlo simulations
    • Power
    • Size
    • Structural break

    ASJC Scopus subject areas

    • Statistics and Probability
    • Mathematics (miscellaneous)
    • Social Sciences (miscellaneous)
    • Economics and Econometrics

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