Bootstrap Determination of the Co-Integration Rank in Vector Autoregressive Models

TY - JOUR

T1 - Bootstrap Determination of the Co-Integration Rank in Vector Autoregressive Models

AU - Cavaliere, Giuseppe

AU - Rahbek, Anders

AU - Taylor, A. M. Robert

PY - 2012/7

Y1 - 2012/7

N2 - This paper discusses a consistent bootstrap implementation of the likelihood ratio (LR) co-integration rank test and associated sequential rank determination procedure of Johansen (1996). The bootstrap samples are constructed using the restricted parameter estimates of the underlying vector autoregressive (VAR) model that obtain under the reduced rank null hypothesis. A full asymptotic theory is provided that shows that, unlike the bootstrap procedure in Swensen (2006) where a combination of unrestricted and restricted estimates from the VAR model is used, the resulting bootstrap data are I(1) and satisfy the null co-integration rank, regardless of the true rank. This ensures that the bootstrap LR test is asymptotically correctly sized and that the probability that the bootstrap sequential procedure selects a rank smaller than the true rank converges to zero. Monte Carlo evidence suggests that our bootstrap procedures work very well in practice.

AB - This paper discusses a consistent bootstrap implementation of the likelihood ratio (LR) co-integration rank test and associated sequential rank determination procedure of Johansen (1996). The bootstrap samples are constructed using the restricted parameter estimates of the underlying vector autoregressive (VAR) model that obtain under the reduced rank null hypothesis. A full asymptotic theory is provided that shows that, unlike the bootstrap procedure in Swensen (2006) where a combination of unrestricted and restricted estimates from the VAR model is used, the resulting bootstrap data are I(1) and satisfy the null co-integration rank, regardless of the true rank. This ensures that the bootstrap LR test is asymptotically correctly sized and that the probability that the bootstrap sequential procedure selects a rank smaller than the true rank converges to zero. Monte Carlo evidence suggests that our bootstrap procedures work very well in practice.

KW - Faculty of Social Sciences

KW - Bootstrap

KW - co-integration

KW - trace statistic

KW - rank determination

U2 - 10.3982/ecta9099

DO - 10.3982/ecta9099

M3 - Journal article

SN - 0012-9682

VL - 80

SP - 1721

EP - 1740

JO - Econometrica

JF - Econometrica

IS - 4

ER -