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Outliers - robust ECM cointegration tests based on the trend components

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Spanish Economic Review

Abstract.

The main goal of this paper is to analyze the behavior of the ECM non-cointegration test when there are additive outliers in the time series under different co-breaking situations. We show that the critical values of the usual ECM test are not robust to the presence of transitory shocks and we suggest a procedure based on signal extraction to bypass this problem. These procedure renders ECM tests with a left tail of distribution under the null that is robust to the presence of additive outliers in the series. The small sample critical values and the empirical power of the test are analyzed by Monte Carlo simulations for several low frequency filters. The proposed empirical methodology is applied to the CPI-based US/Finland real exchange rate.

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Authors and Affiliations

  1. U.D. Matemáticas y Estadística, EUIT Forestal, Universidad Poltécnica de Madrid, Cindad Universitaria, S/n, 28040, Madrid, Spain

    Miguel A. Arranz

  2. Departamento de Economía, Universidad Carlos III de Madrid, 28903, Madrid 126, Getafe (Madrid), Spain

    Alvaro Escribano

Authors
  1. Miguel A. Arranz
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  2. Alvaro Escribano
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Corresponding author

Correspondence to Miguel A. Arranz.

Additional information

JEL Classification:

C22, C12, C15, C52, C51

Corresponding author: Alvaro Escribano

We thank A. Lucas for kindly providing us with the data for the empirical example. Previous drafts of this paper have greatly improved thanks to the comments of two anonymous referees and the Associate Editor. The first author wishes to thank members of Department of Statistics and Econometrics, Universidad Carlos III de Madrid, and Department of Economics, University of Maryland at College Park. The second author acknowledeges support from the following grants: Spanish MCyT BEC2002-00279, The European TMR-ERB-40618C97-0994 and the Secretaría de Estado de Universidades PR2003-0305. This paper was finished while Alvaro Escribano was visiting the Department of Economics, Georgetwon University, Washington DC, USA.

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Arranz, M.A., Escribano, A. Outliers - robust ECM cointegration tests based on the trend components. Spanish Economic Review 6, 243–266 (2004). https://doi.org/10.1007/s10108-004-0089-z

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  • DOI: https://doi.org/10.1007/s10108-004-0089-z

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