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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page A Residual-Based Cointegration Test for Near Unit Root Variables
Erik Hjalmarsson and Par Osterholm
2007-907  (October 2007)

Abstract:  Methods of inference based on a unit root assumption in the data are typically not robust to even small deviations from this assumption. In this paper, we propose robust procedures for a residual-based test of cointegration when the data are generated by a near unit root process. A Bonferroni method is used to address the uncertainty regarding the exact degree of persistence in the process. We thus provide a method for valid inference in multivariate near unit root processes where standard cointegration tests may be subject to substantial size distortions and standard OLS inference may lead to spurious results. Empirical illustrations are given by: (i) a re-examination of the Fisher hypothesis, and (ii) a test of the validity of the cointegrating relationship between aggregate consumption, asset holdings, and labor income, which has attracted a great deal of attention in the recent finance literature.

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Bonferroni test, cointegration, near unit roots

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