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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page The Power of Cointegration Tests
Jeroen J.M. Kremers, Neil R. Ericsson, and Juan J. Dolado
1992-431  (June 1992)

Abstract:  A cointegration test statistic based upon estimation of an error cor­rection model can be approximately normally distributed when no cointegration is present. By contrast, the equivalent Dickey-Fuller statistic applied to residuals from a static relationship has a non-standard asymptotic distribution. When cointegration exists, the error-correction test generally is more powerful than the Dickey-Fuller test. These differences arise because the latter imposes a possibly invalid common factor restriction. The issue is general and has ramifications for system-based cointegration tests. Monte Carlo analysis and an empirical study of U.K. money demand demonstrate the differences in power.

Full paper(397 KB PDF)

Cointegration, Dickey-Fuller statistic, econo­metrics, error correction, power, statistical inference, unit roots

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