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- Publisher
- Wiley
- Copyright
- 1992 Blackwell Publishers Ltd
- ISSN
- 0305-9049
- eISSN
- 1468-0084
- DOI
- 10.1111/j.1468-0084.1992.tb00005.x
- Publisher site
- See Article on Publisher Site
Abstract
I. INTRODUCTION Contrasting inferences about the presence of cointegration often appear in empirical investigations. For example, in applying the commonly used ‘twostep’ procedure proposed by Engle and Granger ( 1987), the Dickey-Fuller unit-root test may only marginally reject the null hypothesis of no cointegration, if it rejects at all. By contrast, the coefficient on the error-correction term in the corresponding dynamic model of the same data may be ‘highly statistically significant’, strongly supporting cointegration; cf. Kremers (1989), Hendry and Ericsson (1991a), and Campos and Ericsson (1988). Both procedures are tests of cointegration, so why should there be such a contrast? A plausible explanation centers on an implicit common factor restriction imposed when using the Dickey-Fuller statistic to test for cointegration. If that restriction is invalid, the Dickey-Fuller test remains consistent, but loses power relative to cointegration tests that do not impose a common factor restriction, such as those based upon the estimated error\ correction coefficient. This paper examines the asymptotic and finite sample properties of the two procedures for a simple, single-lag, bivariate process. Even with more lags and more variabIes, the reason for the low power of the Dickey-Fuller test remains. The error-correction-based test is preferable because
Journal
Oxford Bulletin of Economics & Statistics – Wiley
Published: Aug 1, 1992