The Power of Bootstrap Tests of Cointegration Rank

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Abstract

Bootstrap likelihood ratio tests of cointegration rank are commonly used because they tend to have rejection probabilities that are closer to the nominal level than the rejection probabilities of asymptotic tests. The effect of bootstrapping the test on its power is largely unknown. We show that a new computationally inexpensive procedure can be applied to the estimation of the power function of the bootstrap test of cointegration rank. The bootstrap test is found to have a power function close to that of the level-adjusted asymptotic test. The bootstrap therefore estimates the level-adjusted power of the asymptotic test highly accurately. The bootstrap test may have low power to reject the null hypothesis of cointegration rank zero, or underestimate the cointegration rank. An empirical application to Euribor interest rates is provided as an illustration of the findings.
Original languageEnglish
Peer-reviewed scientific journalComputational Statistics
Volume28
Issue number6
Pages (from-to)2719-2748
Number of pages30
ISSN0943-4062
DOIs
Publication statusPublished - 11.06.2013
MoE publication typeA1 Journal article - refereed

Keywords

  • 112 Statistics and probability
  • Bootstrap, Cointegration, Euribor interest rates, Likelihood ratio test, Test power
  • KOTA2013
  • Equis Base Room

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