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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page A Simple Approach to Robust Inference in a Cointegrating System
Jonathan H. Wright
1999-654  (December 1999)

Abstract:  Cointegration requires all the variables in the system to have exact unit roots; accordingly it is conventional for researchers to test for a unit root in each variable prior to a cointegration analysis. Unfortunately, these unit root tests are not powerful. Meanwhile, conventional cointegration methods are not at all robust to slight violations of the requirement that each variable have a unit root. In this paper I show how this difficulty may be circumvented by instrumenting the regressors in the cointegrating regression by deterministic polynomial time trends or by artificially generated random walks.

Full paper (168 KB PDF)

Cointegration, Local to Unit Roots, Robustness, Instrumental Variables

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