Testing for cointegration with threshold adjustment in the presence of structural breaks

and Karsten Schweikert
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  • Core Facility Hohenheim & Institute of Economics, University of Hohenheim, Stuttgart, Germany
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In this paper, we develop new threshold cointegration tests with SETAR and MTAR adjustment allowing for the presence of structural breaks in the equilibrium equation. We propose a simple procedure to simultaneously estimate the previously unknown breakpoint and test the null hypothesis of no cointegration. Thereby, we extend the well-known residual-based cointegration test with regime shift introduced by (Gregory, A. W., and B. E. Hansen. 1996a. “Residual-based Tests for Cointegration in Models with Regime Shifts.” Journal of Econometrics 70: 99–126) to include forms of nonlinear adjustment. We derive the asymptotic distribution of the test statistics and demonstrate the finite-sample performance of the tests in a series of Monte Carlo experiments. We find a substantial decrease of power of the conventional threshold cointegration tests caused by a shift in the slope coefficient of the equilibrium equation. The proposed tests perform superior in these situations. An application to the “rockets and feathers” hypothesis of price adjustment in the US gasoline market provides empirical support for this methodology.

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SNDE recognizes that advances in statistics and dynamical systems theory can increase our understanding of economic and financial markets. The journal seeks both theoretical and applied papers that characterize and motivate nonlinear phenomena. Researchers are required to assist replication of empirical results by providing copies of data and programs online. Algorithms and rapid communications are also published.