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Finite Sample Performance of Likelihood Ratio Tests for Cointegrating Ranks in Vector Autoregressions

Published online by Cambridge University Press:  11 February 2009

Hiro Y. Toda
Hiro Y. Toda
Affiliation:
Institute of Social and Economic Research Osaka University
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Abstract

This paper investigates through Monte Carlo simulation the finite sample properties of likelihood ratio tests for cointegrating ranks that were proposed by Johansen (1991, Econometrica 59, 1551–1580). We transform the model into a canonical form so that the experiment is well controlled without loss of generality and then conduct a comprehensive simulation study. As expected, the test performance is very sensitive to the value of the stationary root(s) of the process. We also find that the test performance depends crucially on the correlation between the innovations that drive the stationary and the nonstationary components of the process. We conclude that 100 observations are not sufficient to ensure reasonably good performance uniformly over the values of the nuisance parameters that affect the distributions of the test statistics.

Type
Articles
Information
Econometric Theory , Volume 11 , Issue 5 , October 1995 , pp. 1015 - 1032
Copyright
Copyright © Cambridge University Press 1995

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