Local-Explosive Approximations to Null Distributions of the Johansen Cointegration Test, with an Application to Cyclical Concordance in the Euro Area

Guillaume Chevillon (1)

1 SID - Information Systems, Decision Sciences and Statistics Department

This paper considers approximating the nite sample null-distribution of a test statistic as its asymptotic distribution under a local alternative. We focus on the Likelihood Ratio test for the rank of cointegration and use nonlinearities that represent some nite sample distributional features. Reliable approximations are obtained using a class of locally explosive models. An empirical evaluation of the concordance of European business cycles through cointegration shows that some standard corrections lead to underestimating the number of cointegrating relations and induce volatile results.

Keywords: Cointegration; Finite samples; Local-asymptotics; Business Cycle Convergence

Domains: Humanities and Social Sciences; Law; Humanities and Social Sciences; Methods and statistics

Guillaume Chevillon. Local-Explosive Approximations to Null Distributions of the Johansen Cointegration Test, with an Application to Cyclical Concordance in the Euro Area. 2012. ⟨hal-00751925⟩