Cointegration tests under multiple regime shifts: An application to the stock price–dividend relationship
- 339 Downloads
We examine the properties of several residual-based cointegration tests when long-run parameters are subject to multiple shifts driven by an unobservable Markov process. Unlike earlier study, which considered one-off deterministic breaks, our approach has the advantage of allowing for an unspecified number of stochastic breaks. We illustrate this issue by exploring the possibility of Markov switching cointegration in the stock price-dividend relationship and showing that this case is empirically relevant. Our subsequent Monte Carlo analysis reveals that standard cointegration tests are generally reliable, their performance often being robust for a number of plausible regime shift parameterizations.
KeywordsPresent value model Cointegration tests Markov switching
JEL ClassificationC32 G12 E44
Unable to display preview. Download preview PDF.
- Barberis N, Thaler R (2003) A survey of behavioral finance. In: Constantinides G, Harris M, Stultz R (eds) Handbook of the economics of finance, chap 18, vol 1. Elsevier North-Holland, Amsterdam, pp 1053–1128Google Scholar
- Campbell JY (1999) Asset prices, consumption, and the business cycle. In: Taylor JB, Woodford M (eds) Handbook of macroeconomics, chap 19, vol 1. Elsevier, pp 1231–1303Google Scholar
- Froot K, Obstfeld M (1991) Intrinsic bubbles: the case of stock prices. Am Econ Rev 81: 1189–1214Google Scholar
- Granger CWJ (2008) Non-linear models: Where do we go next-time varying parameter models? Stud Nonlinear Dyn Econom 12(3):Article 1Google Scholar
- Harris , D , Inder B (1994) A test of the null of cointegration. In: Hargreaves C (ed) Non-stationary time series analysis and cointegration. Oxford University Press, Oxford, pp 133–152Google Scholar
- Krolzig H-M (1997) Statistical analysis of cointegrated VAR processes with Markovian shifts, manuscript. University of Oxford, OxfordGoogle Scholar
- Leybourne SJ, Mills TC, Newbold P (1998) Spurious rejections by Dickey–Fuller tests in the presence of a break under the null. J Econ 87: 191–203Google Scholar
- Park JY, Hahn SB (1999) Cointegrating regressions with time varying coefficients. Econom Theory 15: 664–703Google Scholar
- Shiller RJ (1981) Do stock prices move too much to be justified by subsequent changes in dividends?. Am Econ Rev 71: 421–436Google Scholar