Abstract
This paper investigates the influence of heteroskedastic variances on cointegration tests. The Monte Carlo simulation results show that cointegration tests allowing for threshold adjustments or structural breaks overreject the null hypothesis of no cointegration in the presence of GARCH errors and variance breaks. In particular, multivariate GARCH and bivariate variance breaks cause severe size distortions in such cointegration tests. On the other hand, a variance ratio cointegration test yields reasonable empirical sizes under most cases of heteroskedastic variances, as compared to other tests including standard cointegration tests.
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Maki, D. The influence of heteroskedastic variances on cointegration tests: A comparison using Monte Carlo simulations. Comput Stat 28, 179–198 (2013). https://doi.org/10.1007/s00180-011-0293-x
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DOI: https://doi.org/10.1007/s00180-011-0293-x