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Testing and Inference in Nonlinear Cointegrating Vector Error Correction Models

Kristensen, D; Rahbek, A; (2013) Testing and Inference in Nonlinear Cointegrating Vector Error Correction Models. Econometric Theory , 29 (6) 1238 - 1288. 10.1017/S0266466613000054. Green open access

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Abstract

We analyze estimators and tests for a general class of vector error correction models that allows for asymmetric and nonlinear error correction. For a given number of cointegration relationships, general hypothesis testing is considered, where testing for linearity is of particular interest. Under the null of linearity, parameters of nonlinear components vanish, leading to a nonstandard testing problem. We apply so-called sup-tests to resolve this issue, which requires development of new(uniform) functional central limit theory and results for convergence of stochastic integrals. We provide a full asymptotic theory for estimators and test statistics. The derived asymptotic results prove to be nonstandard compared to results found elsewhere in the literature due to the impact of the estimated cointegration relations. This complicates implementation of tests motivating the introduction of bootstrap versions that are simple to compute. A simulation study shows that the finite-sample properties of the bootstrapped tests are satisfactory with good size and power properties for reasonable sample sizes.

Type: Article
Title: Testing and Inference in Nonlinear Cointegrating Vector Error Correction Models
Open access status: An open access version is available from UCL Discovery
DOI: 10.1017/S0266466613000054
Publisher version: http://dx.doi.org/10.1017/S0266466613000054
Language: English
Additional information: Copyright © Cambridge University Press 2013.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1423776
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