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Empirical Economics

, Volume 35, Issue 3, pp 497–505 | Cite as

Tests for cointegration with two unknown regime shifts with an application to financial market integration

  • Abdulnasser Hatemi-J
Original Paper

Abstract

It is widely agreed in empirical studies that allowing for potential structural change in economic processes is an important issue. In existing literature, tests for cointegration between time series data allow for one regime shift. This paper extends three residual-based test statistics for cointegration to the cases that take into account two possible regime shifts. The timing of each shift is unknown a priori and it is determined endogenously. The distributions of the tests are non-standard. We generate new critical values via simulation methods. The size and power properties of these test statistics are evaluated through Monte Carlo simulations, which show the tests have small size distortions and very good power properties. The test methods introduced in this paper are applied to determine whether the financial markets in the US and the UK are integrated.

Keywords

Structural break Cointegration Size Power Monte Carlo simulations 

JEL Classification

C12 C15 C22 C52 G11 G15 

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Copyright information

© Springer-Verlag 2007

Authors and Affiliations

  1. 1.Department of Business and ManagementUniversity of Kurdistan-HawlerSkövdeSweden
  2. 2.Department of EconomicsUniversity of SkövdeSkövdeSweden
  3. 3.School of Accounting, Economics and FinanceFaculty of Business and Law Deakin UniversityBurwoodAustralia

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