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Title:
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| Number: | 03-03 |
| Author: | Graham Elliott, Michael Jansson and
Elena Pesavento |
| Issue Date: | February 2003 (revised, August 2004) |
| Abstract: | In situations where theory specifies a potential
cointegrating vector
amongst integrated variables, it is often required that one test for a
unit
root in the constructed cointegrating vector. Although it is
common
to simply employ a univariate test for a unit root for this test, it is
known
that this does not take into account all available information.
We
show here that in such testing situations a family of tests with
optimality properties exists. We use this to characterize the
extent of the loss in power from using popular methods, as well as to
derive a test that works well in practice. We also characterize
the extent of the losses of not
imposing the cointegrating vector in the testing procedure. We
apply
various tests to the hypothesis that price forecasts from the
Livingston data
survey are cointegrated with prices, and find that although most tests
fail
to reject the presence of a unit root in forecast errors the tests
presented here strongly reject this (implausible) hypothesis. |
* Journal of Business and Economic Statistics, forthcoming
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