A Statistical Analysis of Multicointegration

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A Statistical Analysis of Multicointegration

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Vanessa Berenguer-Rico

Josep Llus Carrion-i-Silvestre

Universidad de Barcelona y Parc Cientic de Barcelona

Avda. Diagonal 690, 08034 Barcelona

Tel: +34 93 402 10 10 +34 93 402 18 26 FAX: +34 93 402 18 21

Email: vberenguer@ub.edu, carrion@ub.edu

May 2005

Preliminary draft

Abstract

and Lee (1989, 1990) allowing for regime shifts. Following a single equation ap-

proach and using the I(2) approximation to the concept of multicointegration,

we analyze the eect of the existence of structural breaks on the asymptotic

distributions of estimators and test statistics related to multicointegration. Al-

ternatively we derive new critical values for the residual-based Dickey-Fuller

class of tests that accounts for regime shifts. Finite sample performance is

investigated using Monte Carlo simulation. We complete the study with an em-

pirical application of the life-cycle hypothesis, which is a recurrent example in

the literature of the existence of multicointegration relations in economics.

Life-cycle hypothesis

JEL classication: C12; C22

de Ciencia y Tecnologa SEC2002-01512 and SEC20013672.

1

1 Introduction

It is generally true that any linear combination of I(1) series is also I(1) by the

dominant property of the stochastic trends. However, it is possible that one of

these linear combinations becomes an I(0) time series. When this occurs we say

that the series are cointegrated in the sense of Engle and Granger (1987). More-

over, it could be also possible that the cumulated cointegrated residuals, I(1)

by denition, cointegrate, at the same time, with the I(1) original variables. In

this case, a deeper level of cointegration occurs between the original time series.

Granger and Lee (1989, 1990) denote this sort of cointegration multicointegra-

tion and show that it is a long run relationship which might be expected to

occur in economics.

A recurrent example in the literature of the presence of multicointegration

relationships in economics, rst pointed out by Granger and Lee (1989) and

subsequently analyzed empirically by Siliverstovs (2001) for the USA, is the

life-cycle hypothesis. If now the I(1) series are income and consumption the

economic theory establishes that saving must be stationary, so that income and

consumption are cointegrated. But if we follow the concept of multicointegra-

tion and cumulate saving, we obtain the stock of consumerswealth, which must

cointegrate with consumption according to the life-cycle hypothesis. Another

empirical example is provided by Granger and Lee (1989) who analyze the case

in which the I(1) variables are production and sales such that their dierence

is inventory investment, which cumulated becomes the level of inventories. Fi-

nally, another cited example is Lee (1992) who studied the multicointegration

relations between housing units started and new housing units completed being

then their dierence uncompleted starts, and hence the cumulated uncompleted

starts being housing units under construction. Note that multicointegration

typically occurs in dynamic systems involving both stock and ow variables.

So, in the previous examples the stock of consumerswealth cointegrates with

the I(1) ow variable consumption, the level of inventories (the stock variable)

cointegrates with production (the ow variable), and nally the stock of hous-

ing units under construction cointegrates with housing units started. This kind

of long run relationship shows the stock-ow links amongst multicointegrated

economic variables.

There are in the literature two approaches to test for multicointegration in

a single equation framework: the two step procedure proposed by Granger and

Lee (1989) and the one step procedure provided by Engsted, Gonzalo and Hal-

drup (1997). The main limitation of the proposal in Granger and Lee (1989) is

the feature that the cointegration vector is assumed to be known. This situation

is rarely found in the literature perhaps some exceptions being the PPP hy-

pothesis or stochastic convergence between output so that we should proceed

to estimate it in empirical applications. Notwithstanding, Engsted et al. (1997)

showed that there are some important statistical problems with the two-step

procedure when we have to conduct the estimation of the cointegrating vector,

since the analysis using the Brownian motion process cannot be applied in the

standard way. For this reason, they propose an alternative one-step procedure

2

with favorable statistical properties that is based on the fact that multicoin-

tegration implies I(2) cointegration or polynomial cointegration in a particular

way.

There exist two important features that characterize the concept of multi-

cointegration that motivate our approach. First, multicointegration is a concept

that appears in the long-run. And second, the previous denition of multicointe-

gration assumes invariant parameters in time. However, we should mention that

the longer the time period that is analyzed the higher the probability of nding

a structural change. Consequently, it seems desirable to dene a more general

type of multicointegration that allows for the existence of a changing relation

in time. In fact, the one-step procedure characterizes multicointegration from

cointegration specication at the rst level. If we follow Gregory and Hansen

(1996) in such a way that we account for the possibility of a more general type of

cointegration, where both the deterministic components and the cointegrating

vector are allowed to change during the sample period, we need to generalize

the analysis of Engsted, Gonzalo and Haldrup (1997) taking into account this

broken long run behavior. Additionally, it could be also possible that the lin-

ear combination that describes multicointegration relation had shifted at one

point in time. In this case, it will be necessary to modify again the analysis for

the one-step procedure. Finally, the two previous situations could be present

simultaneously which requires an additional specic treatment.

Following Gregory and Hansen (1996), who link the concept of cointegra-

tion with the idea of structural change, and using the Engsted, Gonzalo and

Haldrup approach to the concept of multicointegration, our purpose is to model

the multicointegration relationship allowing the possibility of regime shifts. In

this respect, we analyze the eect of the existence of structural breaks on the

asymptotic distributions of estimators and test statistics related to the one-step

procedure mentioned above. Along the paper we consider two dierent situa-

tions depending on whether the break point is known or unknown. In order

to cover these frameworks, we derive new critical values for the residual-based

Dickey-Fuller class of tests that accounts for regime shifts. The nite sample

performance is investigated using Monte Carlo simulations. Specically, we an-

alyze the size and power properties of the test statistics and investigate the

ability to estimate the break point when it is unknown. Finally, we study the

behavior of the most commonly used information criteria to select the correct

type of break. We complete the study with an empirical application of the life-

cycle hypothesis, which, as noted above, is a recurrent example in the literature

of the existence of multicointegration relations in economics.

The paper is organized as follows. In section 2 we dene more precisely

the concept of multicointegration and describe the two approaches to test for

multicointegration in a single equation framework. In section 3 we develop

several single-equation regression models that allow for multicointegration with

structural change and give some preliminary theoretical results. In section 4

we analyze the eect of the presence of regime shifts on some asymptotic dis-

tributions of interest. Section 5 contains new critical values to test the null of

non-multicointegration against the alternative of multicointegration with struc-

3

tural breaks. In section 6 we focus on empirical size and power and also in the

precision on break point when it must be estimated. Section 7 reports the be-

havior of some information criteria to select the correct type of break amongst

the models that we have specied. In section 8 we analyze empirically the pre-

vious concepts using the life-cycle hypothesis. Finally, section 9 nishes with

some concluding remarks. All derivations are collected in the Appendix.

2 Multicointegration

Granger and Lee (1989, 1990) but considering the single equation specication

provided by Engsted, Gonzalo and Haldrup (1997). Additionally, we will sketch

the two dierent approaches to test for multicointegration in a single equation

framework.

Consider the case where just two I(1) time series, Xt and Yt , are cointe-

grated. In such case a linear combination of the series will be a new stationary

time series, that is Zt = Yt Xt I(0). P

If we cumulate the cointegrated

t

residuals Zt , we obtain an I(1) variable, St = j=1 Zj , such that it can alterna-

tively cointegrate with either Xt and/or Yt . When this situation is present, an-

other stationary linear combination will exist, (St Xt ) I(0) and we will

be able to conclude that Xt and Yt are multicointegrated. In this case the

multicointegration relationship amongst the variables can be written as

Pt Pt Pt

St Xt = j=1 Zj Xt = j=1 Yj j=1 Xj Xt I(0); (1)

Pt Pt

where j=1 Yj and j=1 Xj are I(2) by construction and Xt is I(1) by deni-

tion. Note that we can understand multicointegration as a particular case of I(2)

cointegration or polynomial cointegration. In the literature the notions of multi-

cointegration and polynomial cointegration are frequently used as synonyms but

note that while polynomial cointegration implies I(2) variables and I(1) variables

directly, the notion of multicointegration is basically linked to I(1) variables, al-

though this could be expressed as a combination of I(2) and I(1) variables and

then be understood as a particular case of polynomial cointegration. So, while

Engle and Yoo (1991), and Lee (1992) are aware of the link between multicoin-

tegration and polynomial cointegration, Engsted, Gonzalo and Haldrup (1997)

take explicitly account of the I(2) property in estimation and hypothesis testing

for multicointegration in a single equation framework.

There are in the literature two approaches to test for multicointegration in

this single equation framework. Granger and Lee (1989, 1990), on the one hand,

propose the following two-step procedure. In the rst step, Yt is regressed onto

Xt obtaining a super-consistent estimate of . The residuals from this regres-

sion, Z^t , can be cumulated and used in the second step. Then, if we calculate

the cumulated sum of Z^t , we obtain the S^t series, which eventually is regressed

onto Xt and/or Yt resulting in a super-consistent estimate of , provided there

4

is multicointegration. On the other hand, using the expression (1) Engsted,

Gonzalo and Haldrup (1997) proposed to estimate the two levels of cointegra-

tion simultaneously. This approach to test for multicointegration presents at

least the following two advantages over the two-step procedure. First, follow-

ing Haldrup (1994), the one-step procedure estimates the cointegration vector

at the rst level at the super-super-consistent rate Op (n2 ), in contrast to the

two-step procedure, which estimates the cointegration vector at the rst level at

the super-consistent rate Op (n). Second, Engsted, Gonzalo and Haldrup (1997)

indicate that, in contrast to the Granger and Lees method, the distributions

concerning tests for multicointegration in a one-step procedure are well-known,

while the approach in Granger and Lee (1989) cannot use the standard asymp-

totics when the cointegrating vector at the rst level has to be estimated.

As we have seen, the one-step procedure characterizes multicointegration

from cointegration specication at the rst level. If we extend the previous

denition of multicointegration and allow for presence of broken deterministic

components and/or regime shifts in the cointegrating vectors at the two levels,

we require modifying the approach of Engsted, Gonzalo and Haldrup (1997).

More precisely, we will consider separately three dierent sources of structural

changes. Firstly, we will follow Gregory and Hansen (1996) and will take into

account the presence of broken deterministic components and/or regime shifts

in cointegration vectors. Secondly, we will study the case where it is allowed

the presence of broken deterministic components and/or regime shift in the

multicointegrating vector but without any structural breaks in the cointegration

relation at the rst level. Finally, we will treat the two previous possibilities

simultaneously. We model these sources of regime shifts in the following.

3.1 The models

In this subsection we develop single-equation regression models that allow for

multicointegration with structural change. Consider a one-dimensional time

series fyt g1 1

0 and m-dimensional time series fxt g0 where both are I(1). In

the rst place we present the standard model of multicointegration without

structural change.

multicointegration as dened in Granger and Lee (1989, 1990). So, rst we

need to have the following standard cointegration model

0 0

yt = ct + xt + zt ; (2)

where fct g1

1 is an s0 -dimensional deterministic sequence of general form but

without structural changes and where zt is an I(0) series. When cumulated

5

Pt

cointegration residuals, St = j=1 zj , cointegrate with fyt g1 1

0 and/or fxt g0 we

obtain the standard multicointegration model, that is

0 0

St = mt + xt + ut ; (3)

changes associated to multicointegration relation and where ut is an I(0) series.

It is now interesting to rewrite, in terms of Engsted, Gonzalo and Haldrup

(1997) approach, the equation (3) to show the specication of interest for the

standard multicointegration model, that is:

Pt 0 0

j=1 zj = mt + xt + ut

Pt Pt Pt

j=1 yj = 0

j=1 cj + 0 mt + 0

j=1 xj + 0

xt + ut

Cmt + 0 Xt + 0 xt + ut ;

Yt = 0

(4)

Pt Pt Pt

where Yt = j=1 yj and Xt = j=1 xj are I(2) variables and Cmt = j=1 cj +

mt is the new m0 -deterministic component associated to multicointegration re-

lation (4) and where m0 = s0 + s1 . Finally, = ( 0 ; 0 )0 .

Now, we proceed to model the multicointegration relation (4) allowing for

the presence of structural changes. To do this we will consider three sources of

structural changes. So, the next three models are based on Gregory and Hansen

(1996) and allow for structural changes in both deterministic components of

the cointegration relation and/or the cointegrating vector. The introduction of

changes in the long-run behavior of the cointegration relation (2) will have a

particular incidence in the specication of the multicointegration relation (4)

when this is expressed in a single equation as in Engsted, Gonzalo and Haldrup

(1997) as shown in the following.

in Model 2 of Gregory and Hansen (1996), that is

0

yt = 1 + 2 DUt + xt + zt ; (5)

where, DUt = 1 for t > Tb and 0 otherwise, being Tb the date of the break, 1

represents the intercept before the break and 2 represents the change in the

intercept at the time of the break.

It will be useful to develop the single equation multicointegration model of

Engsted, Gonzalo and Haldrup (1997) adapted to this case, that is:

St = 0 mt + 0 xt + ut

Pt 0 0

j=1 zj = mt + xt + ut

Pt Pt Pt 0 Pt 0 0

j=1 yj = j=1 1+ 2 j=1 DUj + j=1 xj + mt + xt + ut

6

0 0 0

Yt = mt + 1t + 2 DTt + Xt + xt + ut ; (6)

where DTt = t for t > Tb and 0 otherwise. We prefer to use the most common

variable in the literature DTt dened as DTt = t Tb for t > Tb and 0 otherwise.

To do this we only have to make the following equivalent transformation:

0 0 0

Yt = mt + 1t + 2 DTt 2 Tb DUt + Xt + xt + ut

0 0 0

Yt = mt + 1t + 2 Tb DUt + 2 (DTt Tb DUt ) + Xt + xt + ut

0 0 0

Yt = mt + 1t + 3 DUt + 2 DTt + Xt + xt + ut ; (7)

where 3 = 2 Tb and DTt = (DTt Tb DUt ). Note that in this specication we

are permitting a change in the intercept and a change in the trend.

In this case we allow for the presence of a broken time trend as in Model 3

of Gregory and Hansen (1996), that is

0

yt = 1 + 2 DUt + t+ xt + zt : (8)

0

The corresponding single equation multicointegration model when St = mt +

0

xt + ut is:

0 0

Yt = mt + 1t + 2 DTt + t2 + Xt + 0

xt + ut : (9)

As in Model 2 we rewrite the previous expression using the most common vari-

able DTt , that is:

0 0

Yt = mt + 1t + 2 DTt 2 Tb DUt + t2 + Xt + 0

xt + ut

0 0

Yt = mt + 1t + 3 DUt + 2 DTt + t2 + Xt + 0

xt + ut ;

where 3 and DTt are dened as before.

shift in the long run behavior of cointegration as well as regime shifts in the

cointegration vector. Specically,

0 0

yt = 1 + 2 DUt + 1 xt + 2 xt DUt + zt ; (10)

0

mt + 0 xt + ut is

0 0 0 0

Yt = mt + 1t + 2 DTt + 1 Xt + 2 (XDU )t + xt + ut : (11)

7

In this case 1 and 2 are as in the level shift in cointegration relation model,

1 denotes the cointegrating slope coe cients before the regime shift, and 2

denotes the change in the slope coe cients. Again, it will be interesting to

rewrite the previous model using the DTt variable:

0 0 0 0

Yt = mt + 1t + 3 DUt + 2 DTt + 1 Xt + 2 (XDU )t + xt + ut : (12)

In these case both broken intercept and broken trend are allowed but there is

change in the cointegrating vector as well.

The three previous models permit the presence of structural changes in the

deterministic components of the cointegration relation as well as the presence of

regime shifts in the cointegrating vector as in Gregory and Hansen (1996), which

has particular incidence in the single equation multicointegration specication.

The next model only allows for the presence of structural changes and regime

shifts in multicointegration relation. This specication is given by:

0 0 0

St = mt + 1 xt + 2 xt DUt + ut ;

where fmt g1

1 is an s1 -dimensional general broken deterministic component as-

sociated to the multicointegration relation, 1 denotes the multicointegrating

slope coe cients before the regime shift and 2 denotes

Pt the change in the slope

coe cients. We will use again the expression St = j=1 zj to write the speci-

cation of interest

Pt

where Cmt = j=1 cj + mt Note that in this model no broken deterministic

components are associated to the cointegration relation at the rst level.

Finally we model these sources of regime shifts simultaneously in such a way

that we specify a general model that nests the previous models specications.

multicointegration relations

Thus, we specify the cointegration model which allows for the presence of

structural changes in the deterministic components and regime shifts in the

cointegration vector, that is:

0 0 0

yt = ct + 1 xt + 2 xt DUt + zt ; (14)

where fct g1

1 is an s0 -dimensional broken deterministic sequence of general form.

This cointegration specication nests the Gregory and Hansens models, i.e.

Models 2, 3 and 4. Now, we can model the deeper multicointegration relation

allowing for the possibility of regime shifts as follows:

0 0 0

St = mt + 1 xt + 2 xt DUt + ut

8

Pt 0 0 0

j=1 zj = mt + 1 xt + 2 xt DUt + ut

Pt 0 Pt 0 0 Pt 0 Pt 0 0

j=1 yj = j=1 cj + mt + 1 j=1 xj + 2 j=1 xj DUj + 1 xt + 2 xt DUt +ut

0 0 0 0 0

Yt = Cmt + 1 Xt + 2 (XDU )t + 1 xt + 2 xt DUt + ut : (15)

This general specication nests Models 2, 3 and 4 allowing for the presence

of regime shifts in the two levels of cointegration simultaneously. It will be

useful for the next sections to rewrite the previous model (15) as follows. Let

0 0 0 0 0

Xt = Xt0 ; (XDT )0t , = 1; 2 , xt = x0t ; (xt DUt )0 and

0 0 0

= 1 ; 2 , then we can express the general model as follows:

0 0 0

Yt = Cmt + Xt + xt + ut : (16)

Note that this model is a similar version of the single-equation cointegration re-

gressions with I(1) and I(2) variables considered in Haldrup (1994) and Engsted,

Gonzalo and Haldrup (1997). The only dierence here is the fact that we have

allowed for broken long-run components in the multicointegration regression.

As expected, the denition of all these specications introduces changes in the

limiting distributions of the test statistics that are used to assess the presence

of multicointegration. This is addressed in the following sections.

sumptions

We use in this subsection the general specication given in (16) for Model 6

to give some preliminary theoretical ideas related to the subsequent asymptotic

analysis. The theory makes intensive use of weak convergence methods and

allows for integrated processes that are driven by quite general weakly dependent

and heterogeneously distributed innovations.

First, following Park and Phillips (1989) and Haldrup (1994) we present the

data generated processes of the series that are included in Model 6. So, consider

that the time series fYt g1 m 1

0 and fXt g0 are generated according to

0

Yt = 0 Cmt + Yt0 (17)

where

0

xt = 1 Cmt + x0t ; x0t = "1t (19)

0

Xt = 2 Cmt + Xt0 ; 2

Xt0 = "2t (20)

x0t , Xt0 are the m1 and m2 dimensional stochastic processes integrated of

order one and two, respectively. Yt0 is generally integrated of order two and

linked to x0t and Xt0 through

0

Yt0 0 0

xt Xt0 = ut : (21)

9

The processes x0t ; Xt0 ; Yt0 are initialized at t = 1; 0; 0, respectively, which do

not aect the results and we permit initial values to be any random variable

allowing so a exible specication for the previous data generated processes.

There are in this I(2) system several cointegration possibilities. Specically

we can distinguish the following three dierent cases:

2

ut = vt (22)

ut = vt (23)

ut = vt : (24)

The rst possibility given in (22) states that there do not exist neither cointegra-

tion nor multicointegration because there is not any common stochastic trend

(i.e. ut process is integrated of order two). The second possibility given in (23)

establishes that there is only cointegration at the rst level. To show this fact

0 0 0

note that

Pt in this case

Pt Yt ; Xt 0 PCI(2; 1) with cointegrating vector (1; ) and

t

hence j=1 zj = j=1 yj j=1 x j is integrated of order 1. If it is so, then

the residuals zt must be stationary showing that there is cointegration at the

rst level. Finally, in the last possibility characterized in (24) we conclude that

the variables yt and xt are multicointegrated in such a way that all stochastic

trends are cancelled in the multicointegration relation. We should note that the

general errors driving Yt0 are denoted as vt :The conditional model (21) can be

expressed in terms of Model 6 using (17)-(20), as:

0 0 0 0

Yt = Cmt + xt + Xt + ut = Xtm + ut ; (25)

0 0

where 0 = ( 00 0 0

1 2 ). Depending upon the integration order of ut

there may be stochastic cointegration at dierent levels as well as determinis-

tic cotrending if some elements in 0 turn out to be zero, although the series

individually have nonzero elements in their deterministic part.

To analyze the limiting properties of the processes above we shall make

intensive use of the following three results in our theoretical developments. The

rst is a multivariate invariance principle based on Herrndorf (1984), Phillips

and Durlauf (1986), Haldrup (1994) and Gregory and Hansen (1996); the second

is the weak convergence to stochastic integrals for dependent heterogeneous

processes studied in Hansen (1992) and applied in Gregory and Hansen (1996),

and the third is the continuous mapping theorem (CMT) from Billingsley (1968,

Thm. 5.1).

Before proceeding we must be precise about the sequence wt0 = (vt0 ; "01t ; "02t )0

of allowable innovations. For this reason we establish the following regularity

conditions based on Hansen (1992) for the error sequence wt0 = (vt0 ; "01t ; "02t )0 .

Assumption 1. For some p > > 2, fwt g is a zero mean, strong mixing

sequence with mixing coe cients m of size Pp =(p P) and supt 1 k wt kp =

n n

C < 1. In addition, = limn!1 n 1 E(( j=1 wj )( j=1 wj )0 ) exists with

nite elements and > 0.

10

Now, adopting the same terminology and notation as used in Haldrup (1994),

we require the partial sum of the error sequence wt0 = (vt0 ; "01t ; "02t )0 to satisfy the

following multivariate invariance principle. That is, if we dene [ ] to be the inte-

ger part of its argument and let n be the sample size, then the (p = 1+m1 +m2 )-

P[nr]

dimensional stochastic process Bn (r; ) = n 1=2 t=1 wt dened on the unit

interval [0,1] will converge weakly in distribution to a vectorPBrownianPmotion

n n

process with long-run covariance matrix = limn!1 n 1 E(( j=1 wj )( j=1 wj )0 ) :

where here and elsewhere in the paper = Tb =n is the break fraction, which

indicates the relative position of the break point in the sample, the symbol )

is used to signify the weak convergence of the associated probability measures

as n ! 1 (Billingsley (1968)).

We let B(r; ) = (B0 (r; )0 ; B1 (r; )0 ; B2 (r; )0 )0 conformably with wt , and

by decomposing correspondingly we obtain

2 3

! 00 ! 01 ! 02

= 4 ! 10 11 12 5 = + + 0; (27)

! 20 21 22

P1

where we dene = E(w1 w10 ) and = k=2 E(w1 wk0 ). For subsequent use we

also dene

= + : (28)

In (27) the diagonal submatrices 11 and 22 are assumed to be positive denite

such that x0t and Xt0 are not permitted to be individually cointegrated.

In order to analyze the properties of the least square estimation of (25) we are

interested in the weak convergence of the vector zt = (Cmt 0 ; x0t 0 ; Xt0 0 )0 . First

we begin with the broken deterministic components. For the i-th component,

Cmit , of the deterministic sequence fCmt g1 1 , we assume that there exists an

ei and a function fi (r) such that fni (r) = Cmi[nr] =nei ) fi (r), where fni (r)

and fi (r) both are dened on [0,1] and are bounded. It is also required that

f (r) = ff1 (r); f2 (r); :::; fm0 (r)g be linearly independent to ensure nonsingu-

R1

larity ong 0 f (r)f 0 (r)dr. These conditions are satised by a large number of

deterministic sequences (see Park, 1992; Phillips and Hansen, 1990). Attending

to the above convergence results for the broken deterministic components we

can dene the following m0 m0 diagonal matrix with all normalizing factors

associated to these broken deterministic elements

diagonal matrix, that is

11

where there are all the normalizing factors corresponding to the deterministic,

the I(1), and the I(2) variables. By using Dn we can write

is of bounded variation. The relation that connects zt and Xtm is

2 3

Im0 1 2

Xtm = G0 zt ; where G=4 0 Im1 0 5;

0 0 Im2

Xt = G0 Dn zt

and hence there is a clear one-to-one mapping of Xtm onto zt , which consists of

separate elements that all have well-dened asymptotic limits. More specically,

where

R1 the Lebesgue measure dr will be R 1 suppressed, i.e., integrals of the form

0

B(r)dr are written more simply as 0

B.

Before proceeding, observe that, as is shown in several papers (see, for exam-

ple, Park and Phillips (1989), Haldrup (1994) or Haldrup (1998)), by suitable

scaling it can be shown that limiting process of an I(2) variable is an integrated

Brownian motion. More precisely, since Xt0 are integrated of order two, we

Pt Pk

may write Xt0 , say, as Xt0 = k=1 j=1 "2j , i.e., a repeated random walk.

The limiting process, after suitable normalization, can be described as

3=2

[nr]

P [ns]

P Rr

n "2j ) B2 (s)ds B2 (r); r; s 2 [0; 1];

k=1 j=1 0

where the bar indicate an integrated Brownian motion. Notice that the order

of variation for an I(2) process is Op (n3=2 ), whereas for an I(1) process it is

Op (n1=2 ).

Finally, we can deduce the following lemma using the continuous mapping

theorem (CMT) from Billingsley (1968, Thm. 5.1) and the analysis of Hansen

(1992) of the convergence to stochastic integrals for dependent heterogeneous

processes.

Lemma 1

1

P

n P

n R1

n Dn 1 zt zt0 Dn 1 = n 1

zt zt0 ) 0

B (r; )B 0 (r; );

t=1 t=1

1=2

Pn P

n R1

n Dn 1 zt vt =n 1

zt vt ) 0

B (r; )dB0 (r; )+(00 ; (1 ) 0 0

10 ; 0 ) ;

t=1 t=1

12

3=2

P

n P

n R1

n Dn 1 zt 1

vt = n 1

zt 1

vt ) 0

B (r; )B0 (r; );

t=1 t=1

5=2

Pn Pn R1

n Dn 1 zt 2

vt = n 1

zt 2

vt ) 0

B (r; )B0 (r; ):

t=1 t=1

Note that this is an adapted version to the presence of broken long-run

components of the Lemma 1 in Haldrup (1994). We shall make intensive use

of this Lemma in the next section to derive some asymptotic distributions of

interest.

In this section we analyze how the limiting distributions of the estimator and test

statistics considered in Haldrup (1994) are modied when the multicointegration

model with regime shift is considered.

When we regress statistically independent random walks, i.e. when a spuri-

ous or nonsense relation is estimated, the regression coe cients are signicant

but also this fact is accompanied by a low Durbin-Watson statistic and a rel-

atively good t measured by the coe cient of multiple correlation. This was

shown in the earlier empirical ndings in Granger and Newbold (1974) and the

subsequent theoretical results in Phillips (1986). While the previous authors

were concerned with I(1) variables, Haldrup (1994) analyzed the case when

noncointegrated I(2) and I(1) variables are taken into account. In the sequel,

we generalize the results in Haldrup (1994) allowing for the presence of broken

long-run components in the multicointegration model.

Consider an estimation of the general Model 6, given by:

0

Yt = ^ 0 Cmt + ^ 0 xt + ^ Xt + u

^t = ^ 0 Xtm + u

^t (29)

in which the coe cients are estimated by ordinary least squares. In this context,

and following Haldrup (1994) we will derive the asymptotic distributions of

1

P

n P

n

^= Xtm Xtm0 Xtm Yt

t=1 t=1

" # 1

1

0

Pn

m m0 0

(R^ r) R Xt Xt R (R^ r)=q

t=1

F (^ ) = P

n

n 1 ^2t

u

t=1

13

(iii) Durbin-Watson statistic

P

n

2

(^

ut u

^t 1)

t=2

DW = P

n

^2t

u

t=1

P

n

^2t

u

2 1

R =1 P

n 2

Yt Y

t=1

One of our main results is the following theorem which, generalizes the theorem

of Haldrup (1994) to the presence of broken long run components.

regression model (29). If d denotes the integration order for Yt conditional on

Xtm , i.e. such that d ut = vt is stationary and invertible, then, as n ! 1:

1

R1 R1

n 1=2 d

Dn G( ^ )) B ( )B ( ) 0

B ( )Vd + vd ;

0 0

when this is integrated of order d.

For d=1, V1 = B0 ( ) and v1 = (00 ; 00 ; 00 )0 .

Rr

For d=2, V2 = B0 ( ) = B0 ( ) and v2 = (00 ; 00 ; 00 )0 .

0

Provided the restriction R = r is satised, then for d=0

1

1 R1 R1

F (^) ) v00 + dB0 ( )B 0 ( ) B ( )B 0 ( )

00 0 0

" 1

# 1 1

0

R1 0 0

R1 0

R1

R R B ( )B ( ) R R B ( )B ( ) B 0 ( )dB0 ( ) + v00 =q

0 0 0

14

(iii) Durbin-Watson statistic

1

DW ! 0 of order Op (n ) for d=1,2.

By assuming that Yt is not dominated by higher-order deterministic

trends, we have:

R2 has a nondegenerate limiting distribution for d=2.

Note that the only dierence between the previous result and that nd in

Haldrup (1994) is the fact that when we introduce parameter instability in the

multicointegration relation the asymptotic distributions of the main statistics

depend on the (relative) timing of the change point ( ), i.e. the break fraction

parameter.

Fuller class of tests for multicointegration taking into account the presence of

regime shifts. In particular, as before, we consider cases where the intercept

and/or slope coe cients have a single break. Additionally, we tabulate new

critical values that are necessary to accommodate the presence of these broken

long-run components. To do this, we follow again the Engsted, Gonzalo and

Haldrup (1997) approach to the concept of multicointegration understanding it

as a particular case of polynomial cointegration. This methodology permit us

to use the analysis of Haldrup (1994) to test for a more general type of poly-

nomial cointegration and multicointegration where the long-run elements are

permitted to change during the sample period. These developments generalize

the approaches of Haldrup (1994) and Engsted, Gonzalo and Haldrup (1997)

relaxing the assumption of parameter stability in the multicointegration relation

or I(2) cointegration.

Specically, we will distinguish between two dierent cases. Firstly, we fol-

low Perron (1989) and suppose that the break point is known a priori. And

secondly, we assume that this break point has to be estimated as in Gregory

and Hansen (1996). These two strategies are quite dierent and each requires a

15

specic treatment. For this reason, we present these alternatives in two dierent

subsections. Hence we begin with the rst case in which it is supposed that the

time of break is an exogenous fact, i.e. it is known a priori.

When the date of break is assumed to be known and, hence, exogenous with

respect to the model, the break fraction does not need to be estimated. This

situation might be suitable, for instance, for many German macroeconomic time

series for which the reunication process of 1990 caused a shift in the determin-

istic part of the time series see Ltkepohl, Muller and Saikkonen (1999). Hence

it is interesting to analyze how the limiting distribution of the residual-based

Dickey-Fuller test for multicointegration or I(2) cointegration, studied in Hal-

drup (1994), is modied when the long-run equilibrium relationship has changed

at one known point in time. Moreover, it seems desirable to have a set of critical

values to test for multicointegration with regime shifts when it is assumed that

the date of the break is exogenous.

Consider again a estimation of the Model 6:

0

Yt = ^ 0 Cmt + ^ 0 xt + ^ Xt + u

^t = ^ 0 Xtm + u

^t : (30)

If the variables in the system are multicointegrated the residuals must be sta-

tionary, i.e. integrated of order zero. In most practical situations it is likely

that cointegration to at least I(1) level will occur. For this reason it could be

interesting to test the null of cointegration at the rst level, i.e. u^t I(1)

against the alternative of multicointegration with regime shifts, u^t I(0). By

using the fact that for the general case u

^t I(d)

n1=2 d

^t = n1=2

u d

ut n1=2 d

(^ )0 xt

that is,

1

P

n P

n

n1=2 d

^t = n1=2

u d

ut n1=2 d

ut Xtm0 Xtm Xtm0 Xtm

t=1 t=1

1

P

n P

n

= ut ut zt0 zt zt0 zt ;

t=1 t=1

1

1=2

R1 R1

n u

^ t ) B0 B0 (r; )B 0 (r; ) B (r; )B 0 (r; ) B (r; ) Q(r; );

0 0

(31)

where Q(r; ) is the stochastic process in (r; ) obtained by projecting B0 (r; )

orthogonal to B (r; ).

Since the Brownian motions that comprise Q(r; ) may be correlated, we may

write the processes more generally in terms of uncorrelated Brownian motions.

16

1

!

1=2 R1 0

R1 0

Lemma 2 Q(r; ) = ! 00:1 W0 (r; ) W0 (r; )W (r; ) W (r; )W (r; ) W (r; )

0 0

1=2 0

where ! 00:1 = ! 00 ! 01 111 ! 10 , and W (r; ) = (f (r; ); W10 (r; ); W20 (r; ))0 .

Wi for i=0, 1, 2 are uncorrelated Brownian motions.

Proof. The same as in Haldrup (1994) for a Brownian motions that de-

pends on the break fraction parameter.

As pointed out in Phillips and Ouliaris (1990), this lemma shows how to

reformulate some simple linear and quadratic functional of the Brownian motion

B(r; ) into distributionally equivalent functionals of standard Brownian motion

W (r; ). This representation turns out to be very helpful in identifying key

parameter dependencies in the original expressions.

In order to test the integration order for u ^t , we conduct the augmented

Dickey-Fuller regression,

P

p

u

^t = (^ 1)^

ut 1 + '

^j u

^t j + pt (32)

j=1

and consider the augmented Dickey-Fuller (ADF) test, i.e. the regression t

statistic of (^ 1) from (32), we obtain:

conduct the cointegration relation (30). Then for n ! 1, Tb ! 1 in a way

that = Tb =n remains constant, and with p = Op (n1=3 ), the ADF test following

from the auxiliary regression (32) gives

1=2

R1 R1

ADF ) W 2 (r; ) W (r; )dW (r; )

0 0

where

1

R1 R1

W (r; ) = W0 (r; ) W0 (r; )W 0 (r; ) W (r; )W 0 (r; ) W (r; ):

0 0

Phillips and Ouliaris (1990).

Observe that the distribution of the ADF test depends on the break fraction

parameter. Therefore, it will be useful to obtain new critical values to test for

multicointegration that take into account the presence of this nuisance para-

meter. Since the asymptotic distributions for the test statistic are expressed

as functionals of Brownian motions and they are not given in closed-form, we

use simulation methods to obtain critical values. Specically, we will provide

17

empirical critical values to test for Models 2-6, and hence we will be taking into

account the three dierent sources of regime shifts considered in our previous

modelization.

Models 2-4 allows for the possibility of a specic types of changes in the

cointegration relation during the sample period but without any change in the

deeper level of multicointegration. To simulate critical values we have chosen

separately for the deterministics associated to multicointegration relation (mt )

both zero and intercept. The corresponding models are

For Model 2

0 0

Yt = 1t + 3 DUt + 2 DTt + Xt + xt + ut (33)

0 0

Yt = + 1t + 3 DUt + 2 DTt + Xt + xt + ut : (34)

For Model 3

0

Yt = 1t + 3 DUt + 2 DTt + t2 + Xt + 0

xt + ut (35)

0

Yt = + 1t + 3 DUt + 2 DTt + t2 + Xt + 0

xt + ut : (36)

For Model 4

0 0 0

Yt = 1t + 3 DUt + 2 DTt + 1 Xt + 2 (XDU )t + xt + ut (37)

0 0 0

Yt = + 1t + 3 DUt + 2 DTt + 1 Xt + 2 (XDU )t + xt + ut : (38)

multicointegration relation and with a general form of non broken deterministic

components associated to cointegration relation. To derive critical values for

this model we have chosen the following two specications

0 0 0

Yt = 1 + 2 DUt + 1t + Xt + 1 xt + 2 xt DUt + ut (39)

0

Yt = 1 + 2 DUt + 1t + t2 + Xt + 0

1 xt + 0

2 xt DUt + ut ; (40)

where in (39) ct is an intercept and mt is a broken intercept, i.e. mt = (1; DUt )0 ,

and in (40) ct = (1; t)0 and mt = (1; DUt )0 :

Finally, in order to derive critical values to test for General Model 6 we have

specied the following two models

0 0 0 0

Yt = 1 + 2 DUt + 1t + 1 Xt + 2 (XDU )t + 1 xt + 2 xt DUt + ut (41)

0 0 0 0

Yt = 1 + 2 DUt + 1 t+ 2 DTt + 1 Xt + 2 (XDU )t + 1 xt + 2 xt DUt +ut ; (42)

where in (42) we have chosen a non broken deterministic component for the

cointegration relation (ct is an intercept) but where there exist a regime shift in

cointegration relation. For the deeper level of multicointegration we allow for

broken deterministics and regime shifts in multicointegrating vector, specically

18

mt = (1; DUt )0 . In contrast, in (42) we introduce a break in the intercept of the

cointegration relation, i.e. ct = (1; DUt )0 , and maintain the same specication

for mt , i.e. mt = (1; DUt ).

In general, there are not so much possibilities for the deterministic elements.

When we specify multicointegration as an I(2) system the deterministics asso-

ciated with cointegration relation appear cumulated in the resulting model. So,

the multicointegration relation contains these long-run components in itself and

then to introduce new elements in this deeper level of cointegration will not

have eect in the nal specication of the deterministic components.

The distribution of the Dickey-Fuller t-ratio test that allows for regime shifts

when the time of break is known a priori to test the previous models can be

found in the Appendix. The distribution is derived for the null hypothesis

where at least cointegration at the rst level is found but there is no further

cointegration in the system, i.e. there is no multicointegration. The distribution

depends upon the number of I(1) regressors in the model, m1 , the number of

I(2) regressors, m2 , and the break fraction parameter ( ). For the latter case,

in order to safe space we only show the distribution in which the date of the

break is imposed in the middle of the sample size. For number of I(1) and I(2)

regressors we follow Haldrup (1994) and Engsted, Gonzalo and Haldrup (1997)

and show the cases where m1 = f1; 2; 3; 4g and m2 = f1; 2g. The simulations

were based upon 50,000 replications. These critical values are reported in Tables

12 to 21.

Up to now we have assumed that the date of the break is known a priori.

Notwithstanding, sometimes the information about an event that might have

caused a break is not su ciently clear. In this situation, a second approach

to deal with the dependency of the asymptotic distributions on the nuisance

parameter is required since this parameter requires to be estimated.

To do so, we will follow Gregory and Hansens (1996) methodology to test

for cointegration with regime shift when the time of break is not known a priori.

The approach proceeds in two stages. First, we compute the multicointegration

Dickey-Fuller test for each possible regime shift 2 and, second take the

smallest value across all possible break points. Note that this strategy selects

the break point that provide the greater evidence against the null hypothesis of

non multicointegration. The test statistic is

ADF = inf ADF ( );

2

cointegration with structural shifts as in the preceding subsection.

The previous statistic is a function of every pointwise test statistic, consid-

ered as a function of . This requires the distributional results to hold uniformly

19

over . By using the analysis of Gregory and Hansen (1996) the proof of the

following Theorem will be constructed in such a way that it is allowed the use

of the uniform metrics.

and conduct the cointegration relation (30).Under the null hypothesis

1=2

R1 2

R1

ADF ) inf W (r; ) W (r; )dW (r; )

2 0 0

1

R1 R1

where W (r; ) = W0 (r; ) W0 (r; )W 0 (r; ) W (r; )W 0 (r; ) W (r; )

0 0

0

and as before W (r; ) = (f (r; ); W10 (r; ); W20 (r; ))0 .

Proof. From Theorem 2 we know that for each possible value of the break

fraction the ADF test has a limiting distribution that is well known and this

result hold uniformly over . So, since the supremum mapping is continuous in

the uniform metrics, using the Continuous Mapping Theorem from Billingsley

(1968, Thm. 5.1) Theorem 3 follows immediately.

In this case, in contrast with the distributional theory for the multicointe-

gration model with regime shifts when the time of the break is known, we are

carrying out an explicit minimization over the set of possible breakpoints using

the inmum functional.

Observe that again this limiting distribution, expressed as functionals of

Brownian motions, has not a closed-form. For this reason we tabulate new

critical values to test for multicointegration with a single break of unknown

timing using a simple Monte Carlo experiment.

To derive the critical values we use the specication given by (34), (36),

(38), (40) and (42). Note that now the distribution depends upon the number

of I(1) regressors in the model, m1 , the number of I(2) regressors, m2 but not

upon the break fraction parameter. So, for number of I(1) and I(2) regressors,

as before, we show the cases where m1 = f1; 2; 3; 4g and m2 = f1; 2g. In this

case the simulations were based upon 5,000 replications and for computational

purposes, the test statistic was computed for each break point in the interval

([0:15n]; [0:85n]) following the earlier literature, where [ ] denotes the integer

part. These critical values are reported in Tables 22 to 26.

In this section we analyze how the statistical tests proposed above performs in

nite samples. Specically, we analyze the empirical size and power properties

of both tests and subsequently, we study the precision of break point estimation

20

for the case where it is endogenously estimated. These analyses could result

very interesting for the applied work when nite samples are available. Hence,

we report two dierent subsections. Firstly, we study the size and power of

statistic that test for standard multicointegration and multicointegration with

regime shifts. Specically, the former case is used as a benchmark for the latter.

Secondly, we devote a subsection to show how precise the ADF* test estimate the

break fraction parameter when a broken multicointegration relation is present.

The analysis of empirical size and power is structurated in two parts. First,

the standard multicointegration approach given in Granger and Lee (1989) and

Engsted, Gonzalo and Haldrup (1997) is addresed to dene the benchmark

situation. The design of the experiments follows previous contributions in the

literature. Thus, for the case where only a cointegration relation at the rst

level is specied, Kremers, Ericsson and Dolado (1992) showed that the Dickey-

Fuller test imposes an implicit common factor restriction. If this restriction

is invalid, the Dickey-Fuller test remains consistent, but loses power relative

to cointegration tests that do not impose a common factor restriction, such as

those based upon the estimated error-correction coe cient. We show in this

section how this fact that characterizes the Dickey-Fuller test is also true for

the case when it is used to test for multicointegration.

In this sense, we use the common factor representation for multicointegrated

processes to derive the size and power properties of the Granger and Lee (1989)

and Engsted, Gonzalo and Haldrup (1997) tests.

Suppose that xt , yt are I(1) and are cointegrated, with zt = xt Ayt I(0).

The standard common factor representation is

where Wt is I(1) and x1t , y1t are both I(0). It follows that

t

X t

X

St = zj = (x1j Ay1j );

j=1 j=1

Wt as a component. This will occur if the full decompositions are

Note that in (43) we are dening the processes under the null hypothesis,

while in (44) the data generated processes correspond to those generated under

the alternative hypothesis. For the latter case, we have several local alternatives

depending upon the values for 1 , 2 and the dierent possibilities to obtain an

I(-1) processes, i.e. an overdierenced stationary process. Observe that we can

pass from the null hypothesis to the alternative hypothesis by dening 1 and

21

2 dierent from zero and overdierencing the processes x1t , y1t . In the latter

case consider w1t , w2t dened as

note that for the case where 1 = 2 = 1 we are under the null hypothesis (i.e.

x1t ; y1t I(0)), while for 1 ; 2 < 1 we are under the alternative hypothesis,

such that x2t ; y2t are both I( 1). In the following, we summarize size and

power properties of standard multicointegration tests by showing the rejection

frequencies corresponding to the data generated processes under the null and

alternative hypothesis, respectively.

Firstly, we begin with the two-step procedure proposed by Granger and Lee

(1989). In order to gauge the nite-sample properties of this test, we conduct

a simple Monte Carlo experiment based upon the design of Banerjee, Dolado,

Hendry, and Smith (1986), Granger and Engle (1987), Kremers, Ericsson and

Dolado (1992) and Gregory and Hansen (1996), among others.

Consider the following standard multicointegration model presented in Granger

and Lee (1989), with its corresponding normalization

xt = DSt + ut : (45)

We rst consider the size of the two-step procedure for this specication with

1 = 2 = 0 and 1 = 2 = 1 assuming known cointegration vector, so the

null of cointegration at the rst level is true. Then, we permit 1 ; 2 6= 0 and

1 ; 2 < 1, so the alternative of multicointegration is true in these cases. In

Table 1 we report rejection frequencies drawn from 10,000 replications at the

5% level of signicance using critical values from MacKinnon (1991), as it is

indicated by the authors. Also, two sample sizes (n = 50 and 100) have been

considered.

Regarding the empirical size, we see that the two-step procedure has no

strong distortions for the sample sizes that have been considered, since all values

are around the nominal size. Turning to power, we have studied the following

local alternatives. Firstly, note that for a xed 1 = 2 = 0:5 the power

increases when we move away from the null hypothesis. So, the highest power

correspond to the pure alternative, i.e. when 1 = 2 = 0 and there is no

autorregressive structure in w1t , w2t . Also, the larger the sample size, the

more evident this regularity shows up. Now, we consider the pure alternative

( 1 = 2 = 0), and then increase the values for 1 and 2 . In this case, higher

values of i (i = 1; 2) implies higher power of the test. Again, the larger the

sample size, the more evident results this regularity.

22

Table 1: Empirical size and power of multicointegration test proposed by

Granger and Lee (1989)

No deterministic components

1 = 0 =0 1 = 2 =0

n 1 = 2 = 1 1 = 0 = 0:01 1 = 0 = 0:5 1 = 0 =1

50 0.047 0.189 0.634 0.891

100 0.036 0.356 0.952 0.996

1 = 0 = 0:5

n 1 = 2 = 0:9 1 = 2 = 0:7 1 = 2 = 0:5 1 = 2 =0

50 0.069 0.181 0.294 0.636

100 0.284 0.826 0.908 0.959

The nominal size is set at the 5% level of signicance. The simulations were

based upon 10,000 replications.

Once the nite sample properties of the two-step procedure has been ana-

lyzed, we report in Table 2 the results corresponding to the one-step procedure

provided by Engsted, Gonzalo and Haldrup (1997). The model under consider-

ation is given by

Pt 0 Pt

j=1 xj = Cmt + A0 j=1 yj + D0 yt + ut ; (46)

where we analyze the cases in which Cmt = (1; t) and Cmt = (1; t; t2 ), as these

authors consider in their paper. The experiment results for the empirical size

and power considers the same cases analyzed for the two-step procedure.

The conclusions that we drawn from Table 2 are quite similar to those found

for the Granger and Lee test, irrespective of the deterministic specication.

However, in contrast to the two step-procedure, in this case the power of the

test is invariant to i . Precisely, the explanation of this fact is found on the

implicit common factor restriction that is imposed by the Dickey-Fuller test. To

show this we will use the common factor representation for multicointegrated

processes. This approach permits us to note the dierences between the two

procedures analyzed above with respect to the inuence of the values for i .

For the two-step procedure we have considered (45) as the correct specica-

tion. By using the common factor representation we obtain

t

X

(AWt + 1 Wt + x2t ) = D [(AWj + 1 Wj + x2j ) A (Wj + 2 Wj + y2j )]+ut :

j=1

(47)

Alternatively, for the one-step procedure we have specied (46). Consider

Cmt = 0 without loss of generality. The corresponding common factor rep-

23

Table 2: Empirical size and power of multicointegration test proposed by Eng-

sted et al. (1997)

Linear trend case

1 = 0 = 0 1 = 2 =0

n 1 = 2 = 1 1 = 0 = 0:01 1 = 0 = 0:5 1 = 0 =1

50 0.056 0.998 0.999 0.999

100 0.058 0.999 0.999 0.999

1 = 0 = 0:5

n 1 = 2 = 0:9 1 = 2 = 0:7 1 = 2 = 0:5 1 = 2=0

50 0.088 0.319 0.729 0.997

100 0.214 0.881 0.999 0.999

1 = 0=0 1 = 2 =0

n 1 = 2=1 1 = 0 = 0:01 1 = 0 = 0:5 1 = 0=1

50 0.058 0.994 0.995 0.995

100 0.059 0.999 0.999 0.999

1 = 0 = 0:5

n 1 = 2 = 0:9 1 = 2 = 0:7 1 = 2 = 0:5 1 = 2 =0

50 0.065 0.214 0.560 0.998

100 0.179 0.787 0.997 0.999

The nominal size is set at the 5% level of signicance. The simulations were

based upon 10,000 replications.

24

resentation is given by

t

X t

X

(AWj + 1 Wj + x2j ) = A (Wj + 2 Wj + y2j )+D (Wt + 2 Wt + y2t )+ut :

j=1 j=1

(48)

At this point, it is interesting to note that if we dene 1 = 2 = 0, the common

factor restriction is satised by (48) but not by (47). That is, when 1 = 2 = 0,

(47) is

Xt

(AWt + x2t ) = D [(AWj + x2j ) A (Wj + y2j )] + ut

j=1

which simplies to

t

X t

X

(AWt + x2t ) = D x2j DA y2j + ut ;

j=1 j=1

and so, there is no possibility to obtain a stable relation, i.e. the common factor

restriction does not hold. For this case, the power of the two-step procedure

drops considerably when the pure alternative hypothesis is dened, i.e. when

1 = 2 = 0. Also, observe that this restriction is most satised for higher

values of i , such that the power increases with these parameters do so.

In contrast, when 1 = 2 = 0, (48) is

t

X t

X t

X t

X

AWj + x2j = A Wj + y2j + D (Wj + y2j ) + ut ;

j=1 j=1 j=1 j=1

and given that D is super-consistently estimated to its true value, i.e. zero since

there is not multicointegration in this case, the common factor restriction holds

and the power is high even when 1 = 2 = 0. Specically, observe that in

this case, we are testing for a particular case of polynomial cointegration, i.e.

when only an I(2) regressor cancels all the stochastic trends, but we do not

test for multicointegration as it is dened in Granger and Lee (1989). In fact,

these authors impose the condition ( 1 A 2 ) 6= 0 to ensure the presence of

multicointegration.

If the previous conclusion is true, we always run the risk of testing for mul-

ticointegration nding favorable evidence when in fact there is polynomial coin-

tegration by construction, but not multicointegration. We proposed to test the

signicance of D to detect this kind of spurious multicointegration associated

with the one-step procedure.

Finally, to highlight the incidence of the common factor restriction over the

tests of multicointegration, we have specied the following model using the two-

step procedure to test for multicointegration:

St = Dxt + ut ;

25

where we have normalized to St to be the endogenous variable. The correspond-

ing common factor representation is

t

X t

X

(AWj + 1 Wj + x2j ) A (Wj + 2 Wj + y2j ) = D (Wt + 2 Wt + y2t )+ut ;

j=1 j=1

t

X t

X

(AWj + x2j ) A (Wj + y2j ) = D (Wt + y2t ) + ut :

j=1 j=1

Observe that in this case the common factor restriction holds, given that D is

super-consistently estimated. Monte Carlo experiment shows that in this case

the Granger and Lee test has high power for any value 1 6= 2 6= 0, as it occurs

with the one-step procedure.

The analysis of empirical size and power for the standard multicointegration

framework has dened a benchmark to study the nite sample performance of

the tests proposed in this paper, where multicointegration with regime shifts

is investigated. Note that in this case there are other parameters that could

have incidence over the power of the tests, as for example, the magnitude of the

break or the break fraction parameter.

We start analyzing the ADF test presented in subsection 5.1, that is, the

statistic proposed for the case in which it is assumed that the break point is

known a priori. The results for this statistic are presented in Table 3 and we

study in this case the same local alternatives dened for the case where there

are no regime shifts. To analyze the eect of the magnitude of the structural

break on the power of the test we have essayed two sets of parameters. First,

we specify the following DGP

and dene 1 = (1; 0:02; 0:01; 3; 0:06; 2; 0:1; 1:5; 1), which represents small

magnitude for the structural break eects. Second, we specify

1 + 0:02t + 0:01t2 + 9DUt + 0:18DTt + 2Yt + 0:3Yt DUt + 1:5xt + 3xt DUt + ut

and dene 2 = (1; 0:02; 0:01; 9; 0:18; 2; 0:3; 1:5; 3), to account for a situation

of large magnitude. These parameters are dened for General Model 6, so doing

zero some of them we obtain the other Models 2-5. In this set of experiments

the structural break is located in the middle of the sample ( = 0:5).

26

Table 3: Empirical size and power of ADF Multicointegration with regim shifts test

1 = (1; 0:02; 0:01; 3; 0:06; 2; 0:1; 1:5; 1) 2 = (1; 0:02; 0:01; 9; 0:18; 2; 0:3; 1:5; 3)

1 = 0=0 1 = 2 = 0 1 = 0 = 0 1 = 2 =0

Model n 1 = 2=1 1 = 0 = 0:01 1 = 0 = 0:5 1 = 0 = 1 1 = 2 = 1 1 = 0 = 0:01 1 = 0 = 0:5 1 = 0=1

2 50 0.040 0.987 0.987 0.991 0.041 0.985 0.989 0.984

100 0.052 0.999 0.999 0.999 0.035 0.999 0.999 0.999

3 50 0.031 0.928 0.920 0.960 0.035 0.940 0.946 0.943

100 0.062 0.999 0.999 0.999 0.053 0.999 0.999 0.999

4 50 0.034 0.953 0.955 0.959 0.031 0.951 0.973 0.960

100 0.047 0.999 0.999 0.999 0.045 0.999 0.999 0.999

5 50 0.046 0.960 0.973 0.977 0.033 0.966 0.975 0.968

100 0.054 0.985 0.988 0.976 0.042 0.999 0.999 0.999

6 50 0.031 0.918 0.930 0.919 0.030 0.939 0.925 0.931

100 0.045 0.999 0.999 0.999 0.068 0.999 0.999 0.999

27

1 = 0 = 0:5 1 = 0 = 0:5

Model n 1 = 2 = 0:9 1 = 2 = 0:7 1 = 2 = 0:5 1 = 2 = 0 1 = 2 = 0:9 1 = 2 = 0:7 1 = 2 = 0:5 1 = 2=0

2 50 0.055 0.155 0.391 0.993 0.060 0.129 0.426 0.986

100 0.133 0.654 0.991 0.999 0.074 0.511 0.971 0.999

3 50 0.054 0.114 0.288 0.936 0.039 0.098 0.247 0.944

100 0.117 0.550 0.982 0.999 0.124 0.577 0.972 0.999

4 50 0.059 0.110 0.297 0.963 0.054 0.126 0.320 0.958

100 0.136 0.572 0.971 0.999 0.118 0.574 0.978 0.999

5 50 0.051 0.134 0.343 0.966 0.059 0.117 0.334 0.966

100 0.091 0.181 0.470 0.988 0.106 0.616 0.981 0.999

6 50 0.064 0.112 0.260 0.938 0.053 0.092 0.244 0.924

100 0.125 0.539 0.958 0.999 0.126 0.533 0.962 0.999

The nominal size is set at the 5% level of signicance. The simulations were based upon 10,000 replications.

The results reported in Table 3 indicate that, irrespective of both the mag-

nitude of the structural break and the model specication, conclusions about

empirical size and power are similar to those obtained for the standard multi-

cointegration case.

Let us now focus on unknown break point. Simulations not reported here

show that empirical size is the same as for the case where is known. Finally,

Table 4 contains results associated with the ADF statistic proposed in subsec-

tion 5.2 for the case in which the break point is unknown and, consequently,

it must be estimated. In this case, we only report results for two power ex-

periments concerning the values of 1 ; 2 ; 1 and 2 since conclusions do not

change for the other congurations. Specically, we consider the following local

alternatives. In the rst place, we dene 1 = 2 = 0:5 and 1 = 2 = 0:9, so

the nearest local alternative to the null hypothesis is under consideration. In the

second place, we take as valid parameters 1 = 2 = 0:5 and 1 = 2 = 0, and

then we are under the pure alternative. These two possibilities are considered

for both magnitudes of the structural change 1 and 2 , as dened above. The

goal now is to focus on the impact on power of variations of the break fraction

parameter ( ).

Results in Table 4 indicate that empirical power does not depend on when

1 = 2 = 0, i.e. when we are under the pure alternative, irrespective of

the magnitude of the structural break, the model specication and the sample

size. As expected, power increases with sample size. Notwithstanding, the

picture changes when we move to the alternative dened by 1 = 2 = 0:9. In

this case the I(-1) process is close to become an I(0) almost cancellation of

the over-dierence and now empirical power crucially depends on the sample

size, on the magnitude of the structural break and on the model specication.

In general, we can conclude that the power increases with the break fraction

parameter. Furthermore, we can see that the more involved model in terms of

the elements aected by the structural break, the higher empirical power.

To sum up, simulation experiments indicate that the test statistics proposed

in this paper show good properties in terms of empirical size and power, with

values that resemble those for the standard multicointegration framework.

In this section we investigate the ability of the ADF statistic to estimate the

break point in nite samples. To do so, we use the Monte Carlo experiments

described for the power analysis storing in each replication the estimation of the

break point. As before, we consider the three following possibilities for the break

fraction parameter, which are = f0:25; 0:50; 0:75g. The results are presented

in Table 5 where we report for each Model (2-6) and for two dierent magnitudes

of the structural change. In addition, in order to measure the precision of the

estimation we include the inverse of the variation coe cient the greater the

variation coe cient, the higher the precision. Again, we derive the experiments

for two samples sizes, 50 and 100.

28

Table 4: Empirical size and power of ADF Multicointegration with regime

shifts test

1 = (1; 0:02; 0:01; 3; 0:06; 2; 0:1; 1:5; 1)

1 = 2 = 0:9 1 = 2 =0

Model n = 0:25 = 0:5 = 0:75 = 0:25 = 0:5 = 0:75

2 50 0.057 0.053 0.064 0.972 0.970 0.962

100 0.127 0.145 0.133 0.999 0.999 0.999

3 50 0.042 0.039 0.038 0.893 0.884 0.899

100 0.124 0.125 0.115 0.999 0.999 0.999

4 50 0.078 0.100 0.162 0.946 0.955 0.956

100 0.146 0.443 0.594 0.999 0.999 0.999

5 50 0.116 0.122 0.131 0.936 0.953 0.954

100 0.193 0.307 0.318 0.999 0.999 0.999

6 50 0.097 0.256 0.277 0.939 0.932 0.952

100 0.291 0.615 0.677 0.999 0.999 0.999

2 = (1; 0:02; 0:01; 9; 0:18; 2; 0:3; 1:5; 3)

1 = 2 = 0:9 1 = 2 =0

Model n = 0:25 = 0:5 = 0:75 = 0:25 = 0:5 = 0:75

2 50 0.070 0.086 0.080 0.970 0.949 0.973

100 0.150 0.159 0.157 0.999 0.999 0.999

3 50 0.051 0.082 0.055 0.850 0.873 0.854

100 0.134 0.121 0.130 0.999 0.999 0.999

4 50 0.118 0.363 0.465 0.941 0.962 0.960

100 0.402 0.739 0.874 0.999 0.999 0.999

5 50 0.370 0.507 0.444 0.968 0.966 0.970

100 0.671 0.790 0.781 0.999 0.999 0.999

6 50 0.428 0.629 0.683 0.970 0.963 0.989

100 0.789 0.926 0.999 0.999 0.999 0.999

The nominal size is set at the 5% level of signicance. The simulations were based

upon 10,000 replications.

29

Table 5: Precision in break point estimation

1 = (1; 0:02; 0:01; 3; 0:06; 2; 0:1; 1:5; 1)

1 = 2 = 0:5; 1 = 2 = 0

Model n = 0:25 = 0:5 = 0:75

2 50 0.462 (2.000) 0.510 (2.521) 0.565 (2.508)

100 0.390 (1.875) 0.502 (2.929) 0.622 (3.040)

3 50 0.458 (2.014) 0.518 (2.579) 0.563 (2.580)

100 0.413 (1.908) 0.512 (2.934) 0.599 (2.722)

4 50 0.440 (1.986) 0.520 (3.572) 0.683 (4.349)

100 0.341 (1.990) 0.509 (7.202) 0.744 (9.766)

5 50 0.365 (1.911) 0.506 (4.034) 0.684 (4.255)

100 0.282 (2.840) 0.508 (7.184) 0.741 (8.251)

6 50 0.343 (2.105) 0.518 (5.025) 0.728 (7.559)

100 0.286 (2.872) 0.508 (11.676) 0.753 (17.341)

2 = (1; 0:02; 0:01; 9; 0:18; 2; 0:3; 1:5; 3)

1 = 2 = 0:5; 1 = 2 = 0

Model n = 0:25 = 0:5 = 0:75

2 50 0.294 (2.349) 0.514 (5.736) 0.729 (6.275)

100 0.269 (4.507) 0.508 (10.614) 0.749 (11.814)

3 50 0.315 (2.177) 0.521 (5.383) 0.711 (5.055)

100 0.273 (3.730) 0.508 (9.713) 0.744 (10.385)

4 50 0.331 (2.180) 0.510 (6.052) 0.739 (8.956)

100 0.275 (3.379) 0.509 (15.697) 0.757 (31.468)

5 50 0.284 (2.610) 0.516 (7.121) 0.743 (8.696)

100 0.261 (7.570) 0.509 (15.260) 0.757 (29.358)

6 50 0.290 (2.988) 0.513 (8.656) 0.742 (12.058)

100 0.263 (7.908) 0.509 (24.593) 0.758 (41.688)

The nominal size is set at the 5% level of signicance. The simu-

lations were based upon 10,000 replications.

30

As we can see in Table 5, precision of break point estimation depends on

magnitude of the break that has been considered. Specically, for a small change

1 and for Models 2-4 the ADF* statistic tends to estimate the break point in the

middle of the sample size, a feature that is more evident for small sample sizes.

With respect to Models 5-6 the statistic is more precise than for Models 2-4.

This feature is more evident as the sample size increases. So, when the change is

relatively small, it is easier to detect a correct time of break when it is present a

regime shift than when it only aects the deterministic components. In contrast,

when we consider a large change 2 the ADF* statistic shows better properties

in terms of precision for all models and sample sizes that have been considered.

Hence, as expected this statistic is more precise estimating the break fraction

parameter when it occurs a higher change than when the structural break is

larger than when it is small in relative terms.

At empirical level it will be interesting to try selecting the most appropriate

type of break. As modeled above the change could aect to the deterministic

and/or the slope coe cients. Thus, it is necessary to determine the most appro-

priate specication of the type of break. To this end, we analyze in this section

the behavior of some well-known information criteria whose use is habitual in

econometric modeling. Although the literature oers various criteria, those pro-

posed by Akaike (1973) and Schwarz (1978) have been the most widely used in

empirical applications. For this reason, we only analyze these two proposed

information criteria, which are

2ki

AIC(i) = ln ^ 2i +

n

ln n

BIC(i) = ln ^ 2i + ki ;

n

where n is the available sample size, ki is the number of regressors of the ith

model and ^ 2i = SSRi =n, with SSRi being the sum of the squared residual

of the ith model i = 2; :::; 6. Obviously, the decision strategy is based on the

minimization of these two criteria.

The performance of these information criteria when detecting the correct

type of break is studied through simulations for the specications of interest.

Thus, for each DGP we have estimated the ve models and collect relative fre-

quencies of the selected model based on 10,000 replications. We analyze the

two following cases, in the rst place, we suppose a known time of break and,

subsequently, we derive the same analysis supposing that the time of break is

estimated endogenously, such as we have proceed in the previous sections. More-

over, we study the behavior of the information criteria for the two magnitudes

of the change dened before, i.e. for 1 and 2 .

The results of the experiment when the time of break is assumed to be known

are presented in Tables ?? and 6 for 1 and 2 respectively.

31

Table 6: Behaviour of Information Criteria with known Tb

1 = (1; 0:02; 0:01; 3; 0:06; 2; 0:1; 1:5; 1)

Model 2 Model 3 Model 4 Model 5 Model 6

DGP n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100

Model 2 AIC 0.263 0.403 0.285 0.199 0.188 0.155 0.151 0.162 0.112 0.080

BIC 0.481 0.726 0.233 0.107 0.147 0.080 0.107 0.071 0.031 0.015

Model 3 AIC 0.219 0.018 0.310 0.539 0.186 0.073 0.185 0.344 0.099 0.025

BIC 0.408 0.051 0.255 0.524 0.155 0.074 0.142 0.345 0.039 0.005

Model 4 AIC 0.244 0.132 0.255 0.162 0.257 0.475 0.112 0.045 0.131 0.185

BIC 0.449 0.300 0.201 0.125 0.216 0.491 0.085 0.037 0.048 0.046

Model 5 AIC 0.001 0.000 0.013 0.000 0.002 0.000 0.590 0.879 0.393 0.120

BIC 0.008 0.000 0.016 0.000 0.009 0.000 0.708 0.918 0.258 0.081

Model 6 AIC 0.004 0.000 0.023 0.000 0.007 0.000 0.431 0.122 0.534 0.877

BIC 0.007 0.000 0.028 0.000 0.013 0.000 0.548 0.209 0.403 0.790

32

2 = (1; 0:02; 0:01; 9; 0:18; 2; 0:3; 1:5; 3)

Model 2 Model 3 Model 4 Model 5 Model 6

DGP n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100

Model 2 AIC 0.272 0.423 0.265 0.254 0.200 0.166 0.132 0.050 0.130 0.106

BIC 0.490 0.749 0.213 0.118 0.155 0.074 0.101 0.039 0.040 0.019

Model 3 AIC 0.229 0.015 0.334 0.809 0.168 0.050 0.149 0.081 0.119 0.044

BIC 0.427 0.043 0.260 0.805 0.136 0.054 0.136 0.083 0.040 0.014

Model 4 AIC 0.002 0.000 0.060 0.000 0.663 0.737 0.004 0.000 0.270 0.262

BIC 0.015 0.000 0.057 0.000 0.804 0.908 0.004 0.000 0.119 0.091

Model 5 AIC 0.000 0.000 0.000 0.000 0.000 0.000 0.588 0.896 0.411 0.103

BIC 0.000 0.000 0.000 0.000 0.000 0.000 0.724 0.926 0.275 0.073

Model 6 AIC 0.000 0.000 0.000 0.000 0.000 0.000 0.013 0.000 0.986 0.999

BIC 0.000 0.000 0.000 0.000 0.000 0.000 0.023 0.000 0.976 0.999

As expected there are substantial dierences between the cases where a small

break has been specied and where we specify a large one. Specically, the

information criteria do better for the latter case. In fact, in this situation we

only nd one error, i.e. the model that is selected with the highest frequence

does not correspond with the true DGP the error is remarked in bold faced. In

contrast, when we take into account both small breaks and small sample sizes,

i.e. n = 50, four errors appears as we can see in Table .

The results for the case where the break point has to be estimated, are quite

similar to that commented for the case where the time of break is assumed to be

known. Moreover, these similarities are maintained for all dierent break points

that we have considered, i.e. = f0:25; 0:50; 0:75g. We report these results in

Tables 7 and 8.

33

Table 7: Behaviour of Information Criteria. Tb unknown. 1

Model 2 Model 3 Model 4 Model 5 Model 6

= 0:25 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100

Model 2 AIC 0.162 0.242 0.283 0.219 0.224 0.221 0.184 0.155 0.146 0.162

BIC 0.346 0.532 0.247 0.160 0.202 0.163 0.146 0.098 0.058 0.046

Model 3 AIC 0.156 0.061 0.304 0.453 0.177 0.052 0.236 0.385 0.126 0.048

BIC 0.305 0.104 0.263 0.446 0.161 0.056 0.215 0.379 0.055 0.014

Model 4 AIC 0.157 0.169 0.268 0.215 0.221 0.294 0.194 0.121 0.159 0.200

BIC 0.310 0.411 0.241 0.153 0.205 0.271 0.173 0.092 0.070 0.072

Model 5 AIC 0.085 0.005 0.133 0.048 0.109 0.007 0.443 0.878 0.229 0.061

BIC 0.175 0.010 0.125 0.047 0.118 0.007 0.459 0.895 0.122 0.040

Model 6 AIC 0.099 0.017 0.119 0.023 0.170 0.045 0.338 0.332 0.273 0.582

BIC 0.201 0.058 0.106 0.018 0.179 0.061 0.343 0.426 0.170 0.436

= 0:5 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100

34

Model 2 AIC 0.184 0.296 0.273 0.229 0.229 0.174 0.186 0.171 0.127 0.129

BIC 0.349 0.577 0.232 0.153 0.210 0.122 0.160 0.118 0.048 0.029

Model 3 AIC 0.196 0.067 0.262 0.441 0.171 0.077 0.234 0.366 0.136 0.048

BIC 0.350 0.129 0.234 0.427 0.143 0.067 0.209 0.360 0.063 0.016

Model 4 AIC 0.218 0.159 0.282 0.206 0.185 0.370 0.197 0.083 0.117 0.181

BIC 0.387 0.314 0.234 0.171 0.161 0.370 0.166 0.075 0.051 0.069

Model 5 AIC 0.041 0.000 0.063 0.012 0.041 0.003 0.477 0.782 0.377 0.202

BIC 0.100 0.004 0.060 0.012 0.047 0.004 0.549 0.833 0.243 0.146

Model 6 AIC 0.025 0.005 0.074 0.020 0.073 0.021 0.425 0.247 0.402 0.706

BIC 0.078 0.020 0.068 0.019 0.073 0.018 0.481 0.331 0.299 0.611

= 0:75 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100

Model 2 AIC 0.199 0.237 0.287 0.239 0.200 0.199 0.174 0.181 0.139 0.143

BIC 0.368 0.508 0.247 0.156 0.174 0.153 0.144 0.132 0.066 0.050

Model 3 AIC 0.175 0.071 0.315 0.452 0.140 0.067 0.246 0.366 0.123 0.043

BIC 0.308 0.139 0.285 0.432 0.124 0.059 0.226 0.355 0.056 0.014

Model 4 AIC 0.210 0.289 0.281 0.227 0.194 0.200 0.161 0.073 0.153 0.210

BIC 0.381 0.525 0.242 0.154 0.163 0.190 0.135 0.050 0.078 0.080

Model 5 AIC 0.055 0.003 0.096 0.034 0.059 0.007 0.472 0.862 0.317 0.093

BIC 0.119 0.013 0.086 0.035 0.052 0.007 0.515 0.878 0.227 0.066

Model 6 AIC 0.082 0.040 0.095 0.041 0.079 0.049 0.371 0.221 0.372 0.645

BIC 0.144 0.097 0.088 0.026 0.082 0.055 0.425 0.275 0.260 0.546

Table 8: Behaviour of Information Criteria. Tb unknown. 2

Model 2 Model 3 Model 4 Model 5 Model 6

= 0:25 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100

Model 2 AIC 0.239 0.290 0.198 0.257 0.194 0.183 0.169 0.110 0.199 0.159

BIC 0.368 0.508 0.154 0.169 0.192 0.154 0.166 0.105 0.119 0.063

Model 3 AIC 0.200 0.063 0.244 0.616 0.188 0.038 0.219 0.252 0.148 0.030

BIC 0.305 0.112 0.206 0.596 0.191 0.028 0.210 0.249 0.087 0.014

Model 4 AIC 0.126 0.051 0.112 0.022 0.416 0.592 0.077 0.014 0.268 0.320

BIC 0.202 0.092 0.100 0.019 0.473 0.707 0.074 0.017 0.150 0.164

Model 5 AIC 0.022 0.004 0.009 0.001 0.047 0.002 0.580 0.806 0.341 0.186

BIC 0.036 0.005 0.006 0.001 0.041 0.003 0.646 0.838 0.270 0.152

Model 6 AIC 0.049 0.006 0.022 0.006 0.085 0.028 0.234 0.099 0.609 0.860

BIC 0.073 0.012 0.011 0.006 0.079 0.026 0.301 0.149 0.535 0.806

= 0:50 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100

35

Model 2 AIC 0.286 0.358 0.235 0.196 0.200 0.182 0.176 0.134 0.102 0.129

BIC 0.465 0.605 0.180 0.119 0.166 0.129 0.149 0.098 0.039 0.048

Model 3 AIC 0.247 0.046 0.243 0.531 0.191 0.103 0.210 0.237 0.108 0.082

BIC 0.427 0.116 0.182 0.517 0.150 0.107 0.190 0.228 0.050 0.031

Model 4 AIC 0.075 0.044 0.146 0.090 0.508 0.615 0.052 0.013 0.218 0.237

BIC 0.131 0.079 0.128 0.083 0.592 0.726 0.040 0.012 0.108 0.099

Model 5 AIC 0.009 0.001 0.007 0.000 0.013 0.000 0.557 0.718 0.413 0.280

BIC 0.013 0.001 0.008 0.000 0.011 0.000 0.674 0.784 0.293 0.214

Model 6 AIC 0.012 0.006 0.029 0.019 0.032 0.008 0.233 0.126 0.693 0.840

BIC 0.018 0.014 0.029 0.017 0.034 0.010 0.276 0.155 0.642 0.803

= 0:75 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100 n = 50 n = 100

Model 2 AIC 0.243 0.288 0.227 0.216 0.216 0.208 0.154 0.074 0.159 0.213

BIC 0.399 0.534 0.182 0.135 0.195 0.190 0.140 0.058 0.083 0.082

Model 3 AIC 0.220 0.038 0.226 0.677 0.162 0.063 0.219 0.164 0.172 0.057

BIC 0.336 0.089 0.205 0.660 0.147 0.062 0.213 0.160 0.098 0.028

Model 4 AIC 0.171 0.055 0.116 0.032 0.390 0.568 0.022 0.013 0.300 0.331

BIC 0.272 0.102 0.091 0.024 0.418 0.691 0.027 0.008 0.191 0.174

Model 5 AIC 0.030 0.002 0.025 0.003 0.047 0.011 0.581 0.792 0.316 0.191

BIC 0.049 0.004 0.017 0.004 0.045 0.012 0.624 0.828 0.264 0.151

Model 6 AIC 0.068 0.038 0.033 0.014 0.147 0.072 0.130 0.073 0.621 0.802

BIC 0.094 0.061 0.025 0.008 0.146 0.078 0.148 0.080 0.586 0.772

Hence, we can conclude that irrespective of whether the time of break is

known or unknown, the information criteria behave much better when it has

occurred a signicant structural break than when it has been small in relative

terms. Also, it is only true for the small sample sizes, n = 50. So, these cases,

it is di cult for the information criteria to distinguish between Models 2, 3 and

4. This is not surprising since all models specied have breaks that come from

cointegration at the rst level. But, furthermore, AIC and BIC fail to select

between Models 5 and 6, again when n = 50. Specically, both information

criteria select Model 5 when the true model is Model 6.

These conclusions show us that if we work with both large sample sizes and

structural breaks, the use of AIC and BIC should be used to select between

models that have been proposed in this paper.

8 Empirical application

In this section we illustrate our proposal by testing empirically the assumption

of parameter instability in the life cycle hypothesis. This consumption theory

describes the economic relations amongst both stock and ow variables, i.e.

amongst consumption, income and wealth, conforming so a good example of the

presence of multicointegration relations in economics. There are few empirical

contributions that use the concept of multicointegration to test the life cycle

hypothesis. One of them is Siliverstovs (2001) who test for the existence of

stable multicointegration relation between real per capita private consumption

expenditure and real per capita disposable personal income in the USA nding

positive evidence.

By using the modelization of consumer expenditure provided by Siliverstovs

(2001) we investigate the presence of instable multicointegration relation be-

tween income and consumption in France. The selection of this country is based

on the fact that some previous empirical studies of the consumption expenditure

in France show favorable evidence to the presence of structural breaks (see for

example, Dufrenot and Mignon (2004) or Sefton and Veld (1999)).

The statistical models used to test the life cycle hypothesis under structural

changes are Models 1-6 presented in section 3. For Model 1, if we consider now

that yt and xt are income and Pt consumption respectively, then the cumulated

1

cointegrated residuals, St = j (yj xj ), can represent a measure of private

wealth. Other empirical exercises in the econometric literature approximate

the stock of wealth by summation of the past discrepancies between disposable

income and consumption expenditure as in Stone (1966) or Silivertovs (2001).

By construction this variable, St , is an I(1) process, which can form a deeper

cointegrating relation with either one of the original ow variables or both. If

it is so, a multicointegration relation will be present amongst consumption and

income describing the stock-ow links between these variables and the stock of

consumerswealth.1 We can express this relation in terms of Engsted, Gonzalo

1 Note that in the cointegration relation we estimate the parameter . Campbell (1987) de-

nes this parameter as the marginal propensity to consume out of the hypothetical permanent

36

and Haldrup (1997) approach to the concept of multicointegration as follows

1

Yt Xt + yt + xt I(0);

The previous equation refers to Model 1 without deterministic elements,

which easily can be generalized including them. In the same way we could

dene Models 2-6 allowing for a broken multicointegration relations. In the rst

place, we study the integration order of the original variables consumption

and income by using the univariate ADF test. In the second place, we test

for Model 1 where a stable multicointegration relation is specify by using the

method proposed in Engsted, Gonzalo and Haldrup (1997). If we nd that

the standard multicointegration model is not a good representation of the data

then, we will proceed to test for Models 2-6 by applying the statistic proposed in

subsection 5.2, which permit us to estimate endogenously the date of the break.

These stages will be applied to the private nal consumption expenditure at

constant prices and net national disposable income at constant prices for France

in the period 1960-2005. The net national disposable income has been expressed

in real terms by using the price deator of private nal consumption expenditure.

The data set has been taken from AMECO database of the European Union.

The results of implement the univariate ADF test upon consumption and

income time series give us the evidence that these series are integrated of or-

der one by using the critical values tabulated in MacKinnon (1991) the values

of the ADF-statistics are -2.32 and -2.92 respectively.for all dierent data sets

that have been considered absolute variables, variables in logs, variables in per

capita terms and the log of the latter.2 This fact invites us to test for both

standard cointegration and standard multicointegration. Engsted, Gonzalo and

Haldrup (1997) proposed a procedure that permits to test both levels of cointe-

gration simultaneously. Table 9 show the results of implement this procedure.3

Hence, Table 9 shows, by using the critical values tabulated in Engsted et al.

(1997), that we cannot reject the null hypothesis of non multicointegration for

all dierent data sets that have been considered. The lack of multicointegration

could be caused by the presence of a changing or unstable relation, which can

be tested applying the statistics proposed in this work. Since the date of the

break is not a clear fact we present the results for the test statistic that estimate

endogenously the date of the break. The results to implement this statistic to

Models 2-6 are presented in Table 10.4

income.

2 In the literature several transformation of the data are used in applied work. We show the

main dierent possibilities found in the literature to analyze the behaviour of the consumption

expenditure.

3 The number of lags in the auxiliary regression have been determined by using the general

to specic procedure proposed by Ng and Perron (1995) and impossing a maxim of 6 lags.

4 The number of lags in the auxiliary regression have been determined by using the general

to specic procedure proposed by Ng and Perron (1995) and impossing a maxim of 6 lags.

37

Table 9: ADF test for standar multicointegration

Expressed variables Linear trend case Quadratic trend case

Absolute terms -2.42 -2.57

log -4.25 -4.37

Per capita terms -2.50 -2,61

log of per capita terms -3.76 -4.22

Critical values are taken from Tables 1 and 2 of Engsted, Gonzalo and Haldrup

(1997). For the case where a linear trend is included the critical values are

-5.47, -4.74 and -4.38 for a signicance levels 0.01, 0.05 and 0.1, respectively.

Expressed variables Model 2 Model 3 Model 4 Model 5 Model 6

Absolute terms -7.25 -7.07 -7.18 -5.61 -6.56

log -6.05 -7.84 -7.92 -5.40 -6.01

Per capita terms -7.01 -7.65 -7.46 -5.33 -6.73

log of per capita terms -5.47 -7.76 -7.79 -5.15 -5.99

Critical values can be found in the appendix.

By using the critical values in the appendix, the ADF statistic reveals

the presence of a broken multicointegration relation amongst consumption and

income in France. Specically, the null hypothesis is rejected for Models 2, 3

and 4, which specify structural changes coming from cointegration relation at

the rst level but is not rejected for Models 5 and 6, which allows for regime

shifts in multicointegration relation.5 The break point is estimated in 1977

for all models, which present an evidence of broken multicointegration relation.

This date is located between the two oil crisis and show the fact that France

had a permanent shock into the multicointegration relation between income and

consumption by this time.

Finally, we use the two information criteria discussed above to select between

Models 2-4. The results are showed in Table 11.

The conclusion that we extract from Table 11 is that the best model to

describe the multicointegration relation with a regime shift between income and

consumption in France is Model 4. Hence, we conclude that a regime shift in

cointegration relation characterizes the long-run behavior between income and

consumption in France.

5 An ADF test for standar cointegration has been applied to the keynesian consumption

function providing evidence against the presence of a long-run equilibrium relationship. Ad-

ditionally, the statistic proposed in Gregory and Hansen (1996) has been applied nding

positive evidence of a broken cointegration relation for a Models 2 and 4. For saving space

we do not present these results. Note however, how the ADF* statistic has detect this broken

cointegration relation at the rst level.

38

Table 11: Information criteria to select between Models 2-4

Absolute terms log Per capita log of per capita

AIC BIC AIC BIC AIC BIC AIC BIC

Model 2 -3.34 -3.06 -7.49 -7.21 -25.15 -24.87 -7.44 -7.16

Model 3 -3.34 -3.02 -7.51 -7.19 -25.17 -24.85 -7.51 -7.19

Model 4 -3.31 -2.99 -7.52 -7.21 -25.15 -24.83 -7.52 -7.21

In this paper we generalize the concept of multicointegration proposed by Granger

and Lee (1989) by relaxing the assumption of parameter stability. To do so we

have adopted the Engsted, Gonzalo and Haldrup (1997) approach to the con-

cept of multicointegration and have followed Gregory and Hansen (1996) to

model the multicointegration relation allowing for a changing relation in time.

This more general concept of multicointegration requires varying the analysis

of Haldrup (1994) and Engsted, Gonzalo and Haldrup (1997) taking into ac-

count this broken long-run behavior. Hence, rst we analyze the eect upon the

limiting distributions of estimators and some derived test statistics related to

multicointegration when some regime shift is present. In the second place, we

have presented two approaches to test for multicointegration with regime shifts

using the Dickey-Fuller class of tests. Specically, in the rst approach we have

supposed a known time of break and we have derived the limiting distribution

of the Dickey-Fuller test, which allows for a single regime shift. Moreover, we

have computed new empirical critical values for this distribution by using Monte

Carlo methods. The second approach to test for multicointegration with regime

shifts does suppose an unknown break fraction parameter and, hence, it has to

be estimated. Following again Gregory and Hansen (1994) we propose to com-

pute the multicointegration Dickey-Fuller test for each possible regime shift,

and then take the smallest value across all possible break points. As before we

derive the limiting distribution of this statistic and compute empirical critical

values of this distribution by using simulation methods.

The main theoretical result is the fact that the limiting distributions of the

estimators and test statistics associated to multicointegration depend on the

break fraction parameter, i.e. the time of the break. This fact should be taken

into account in applied work when it is of interest to test for multicointegration

in a large sample period where the probability of a change in the relation is

high.

In addition, we can conclud, from some Monte Carlo experiments that we

have carried out, that the nite sample performance of the tests statistics pro-

posed in this paper has the expected properties in terms of size, power and

precision in the estimation of break point. Moreover, the Akaike and Schwarz

information criteria seem good tools to select among Models 2-4, specially when

there is a large structural break and we dispose of a large sample size.

In order to analyze the previous theoretical results we have provided an em-

39

pirical application of the life cycle hypothesis. Specically, we have found a

broken multicointegration relation between consumption expenditure and pri-

vate income in France.

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42

A Mathematical appendix

A.1 Proof of Lemma 1

We will proof the previous results by using a simple case because for the most

general model this is a straighforward extension. Specically, we will use the

next specication of Model 5:

0

yt = + xt + zt

0 0

St = 1 + 2 DUt + 1 xt + 2 xt DUt + ut

0 0 0

Yt = 1 + t+ 2 DUt + 1 xt + 2 xt DUt + Xt + ut

where in this case

0 0 0

zt = (10n ; t0 ; DUt0 ; x0t ; (x0t DUt ); Xt0 )0

Proof of Lemma 1

1

P

n P

n

(i) n Dn 1 zt zt0 Dn 1 = n 1

zt zt0

t=1 t=1

1

P

n 0 0 0 0 0 0

=n (10n ; t0 ; DUt0 ; x0t ; (x0t DUt ) ; Xt0 )0 (10n ; t0 ; DUt0 ; x0t ; (x0t DUt ) ; Xt0 )

t=1

0 1

Pn Pn 0 Pn Pn 0

n t n Tb x0t x0t Xt0

B C

B t=1 t=1 t=T b+1 t=1 C

B P n P

n P n 0 Pn

00

Pn 0 C

B t 2

t tx 0

tx tX 0 C

B t t t C

B t=1 t=T b+1 t=1 t=T b+1 t=1 C

B Pn Pn Pn 0 C

B n T b x 0

x 0

X 0 C

B t t t C

=n 1B B

t=T b+1

Pn

t=T b+1

P

n

t=T b+1

Pn

C)

C

B 0 0 0

0 00 0 0 0

C

B x x

t t x x

t t x X

t t C

B t=1 t=T b+1 t=1 C

B P

n

0 00

Pn C

B x x x0 00 C

X

B t t t t C

B t=T b+1 t=T b+1 C

@ Pn 0 A

Xt0 Xt0

0 1 t=1

R1 R1 R1

B 1 1=2 1 B1 B1 B2 C

B 0 0 C

B R1 R1 R1 C

B 1 2 C

B 1=3 2 rB 1 rB 1 rB 2 C

B 0 0 C

B C

B R1 R1 R1 C

B 1 B1 B1 B2 C

B C R1

B C ) B (r; )B (r; )0

B R1 R1 R1 C

B B1 B10 B1 B1 0 B1 B2 C 0

B C

B 0 0 C

B R1 R1 C

B 0 C

B B1 B1 B1 B2 C

B C

B C

@ R1 A

B2 B2

0

43

1=2

P

n P

n

(ii) n Dn 1 zt vt = n 1

zt vt

t=1 t=1

1

P

n 0 0 0

=n (10n ; t0 ; DUt0 ; x0t ; (x0t DUt ) ; Xt0 )0 vt

t=1 0 1

0 1 R1

Pn

B dB0 C

vt B 0 C

B t=1 C B C

B P n C B R1 C

B tvt C B rdB C 0 1

B C B 0

C

B t=1 C B 0 C 0

B Pn C B R1 C B C

B vt C C B dB0 C B 0 C

B B C B C

B C 0

= n 1 B t=T b+1

C)B B

C+B

C B

C

C

B P n

x0t vt C C R

1

B B dB C B

0

10 C

B B 1 0 C @ (1 0 A

B t=1 C B C ) 10

B P n C B R1

0

C

B 0

xt vt CC B C 0

B B B1 dB0 C

B t=T b+1 C B C

@ P n A B 1 C

Xt0 vt @ R A

t=1 B 2 dB 0

0

R1

) 0 B (r; )dB0 (r; ) + (00 ; 00 ; 00 ; 010 ; (1 ) 010 ; 00 )0

3=2

P

n P

n

(iii) n Dn 1 zt 1

vt = n 1

zt 1

vt

t=1 t=1

1

Pn 0 0 0

=n (10n ; t0 ; DUt0 ; x0t ; (x0t DUt ) ; Xt0 )0 1

vt

t=1 0 1

0 1 R1

Pn

1 B B0 C

vt B 0 C

B t=1 C B R1 C

B P n C B C

B t 1

v C B rB C

B t C B 0

C

B t=1 C B 0 C

B Pn C B R1 C

B 1

v C B B C

B t C B 0 C R1

1 B t=T b+1 C B C)

=n B P n C ) B R1 C 0

B (r; )B0 (r; )

B C B B1 B0 C

0 1

B x t v t C B C

B t=1 C B 0 C

B P n C B C

B x0 1

v C B R1 C

B t t C B B 1 0 C

B

B t=T b+1 C B C

@ P n A B 1 C

Xt0 1

vt @ R A

t=1 B2 B0

0

5=2

P

n P

n

(iv) n Dn 1 zt 2

vt = n 1

zt 2

vt

t=1 t=1

1

Pn 0 0 0

=n (10n ; t0 ; DUt0 ; x0t ; (x0t DUt ) ; Xt0 )0 2

vt

t=1

44

0 1

0 1 R1

P

n

2 B B0

C

vt B C

B t=1 C B 0

C

B Pn C B R1 C

B t 2

vt C B rB0 C

B C B C

B t=1 C B 0 C

B Pn C B R1 C

B 2

vt C C B B0 C

B B C R

B C C ) 1 B (r; )B0 (r; )

=n 1B t=T b+1

Pn C)B

B R1 C 0

B C B

x0t B1 B0 C

2

B vt C B C

B t=1 C B C

B Pn C B

0

C

B xt0 2 C

vt C B R1 C

B B B1 B0 C

B t=T b+1 C B C

@ Pn A B C

Xt 0 2

vt @ R1 A

t=1 B2 B0

0

45

Table 12: Critical values for Model 2 ( = 0:5) (mt = 0)

Probability of a smaller value

m2 = 1 m1 = 2

m1 n 0.01 0.025 0.05 0.10 0.01 0.025 0.05 0.10

0 25 -5.95 -5.42 -4.99 -4.55 -6.56 -6.01 -5.55 -5.07

50 -5.23 -4.83 -4.52 -4.17 -5.67 -5.27 -4.92 -4.58

100 -4.94 -4.60 -4.34 -4.03 -5.33 -4.97 -4.68 -4.37

250 -4.76 -4.47 -4.22 -3.93 -5.11 -4.78 -4.53 -4.24

500 -4.72 -4.43 -4.18 -3.89 -5.04 -4.73 -4.49 -4.20

1 25 -6.42 -5.85 -5.41 -4.95 -7.06 -6.43 -5.94 -5.45

50 -5.61 -5.20 -4.88 -4.53 -6.03 -5.63 -5.28 -4.91

100 -5.29 -4.95 -4.67 -4.36 -5.63 -5.30 -5.01 -4.67

250 -5.12 -4.78 -4.53 -4.24 -5.41 -5.09 -4.82 -4.53

500 -5.05 -4.75 -4.50 -4.21 -5.33 -5.03 -4.78 -4.49

2 25 -6.88 -6.28 -5.81 -5.32 -7.48 -6.84 -6.35 -5.81

50 -5.98 -5.57 -5.23 -4.87 -6.36 -5.96 -5.61 -5.24

100 -5.59 -5.26 -4.97 -4.64 -5.93 -5.58 -5.29 -4.97

250 -5.44 -5.11 -4.82 -4.53 -5.71 -5.38 -5.11 -4.80

500 -5.33 -5.03 -4.78 -4.49 -5.59 -5.30 -5.04 -4.76

3 25 -7.30 -6.69 -6.20 -5.69 -7.92 -7.25 -6.72 -6.18

50 -6.30 -5.89 -5.54 -5.17 -6.69 -6.26 -5.91 -5.52

100 -5.89 -5.55 -5.26 -4.93 -6.20 -5.86 -5.56 -5.23

250 -5.71 -5.36 -5.10 -4.80 -5.95 -5.64 -5.37 -5.07

500 -5.60 -5.30 -5.05 -4.76 -5.85 -5.56 -5.31 -5.01

4 25 -7.64 -7.05 -6.56 -6.05 -8.31 -7.60 -7.08 -6.53

50 -6.63 -6.21 -5.85 -5.47 -7.00 -6.56 -6.20 -5.81

100 -6.18 -5.84 -5.54 -5.21 -6.48 -6.13 -5.82 -5.50

250 -5.95 -5.63 -5.36 -5.06 -6.20 -5.88 -5.62 -5.32

500 -5.86 -5.55 -5.31 -5.02 -6.09 -5.80 -5.55 -5.26

Critical values for the multcointegration ADF statistic to test for model 2.

The break fraction parameter has been imposed exogenously in the middel of

the sample size ( = Tb =n = 0:5). No deterministics have been included in

multicointegration relation (mt = 0). The indices m1 and m2 indicate the

number of I(1) and I(2) variables, respectively. n indicates the sample size.

The simulations were based upon 50,000 replications.

46

Table 13: Critical values for Model 2 ( = 0:5) (mt = 1)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0.01 0.025 0.05 0.10 0.01 0.025 0.05 0.10

0 25 -6.51 -5.97 -5.54 -5.09 -7.12 -6.53 -6.06 -5.56

50 -5.72 -5.32 -4.98 -4.64 -6.12 -5.70 -5.36 -4.99

100 -5.37 -5.01 -4.72 -4.42 -5.67 -5.34 -5.05 -4.72

250 -5.17 -4.84 -4.59 -4.31 -5.43 -5.14 -4.88 -4.59

500 -5.07 -4.78 -4.55 -4.27 -5.34 -5.06 -4.82 -4.54

1 25 -6.91 -6.37 -5.92 -5.44 -7.55 -6.93 -6.44 -5.92

50 -6.07 -5.64 -5.31 -4.93 -6.44 -6.03 -5.67 -5.29

100 -5.65 -5.32 -5.02 -4.70 -5.97 -5.61 -5.33 -5.00

250 -5.44 -5.13 -4.87 -4.58 -5.71 -5.40 -5.14 -4.85

500 -5.34 -5.07 -4.82 -4.54 -5.63 -5.33 -5.09 -4.80

2 25 -7.30 -6.75 -6.29 -5.79 -7.94 -7.33 -6.81 -6.28

50 -6.37 -5.96 -5.61 -5.24 -6.77 -6.32 -5.96 -5.57

100 -5.94 -5.60 -5.31 -4.99 -6.24 -5.89 -5.60 -5.28

250 -5.70 -5.39 -5.13 -4.83 -5.95 -5.65 -5.40 -5.10

500 -5.62 -5.32 -5.08 -4.80 -5.88 -5.58 -5.34 -5.04

3 25 -7.78 -7.14 -6.66 -6.14 -8.39 -7.70 -7.17 -6.62

50 -6.71 -6.26 -5.91 -5.53 -7.06 -6.62 -6.26 -5.86

100 -6.22 -5.87 -5.58 -5.25 -6.49 -6.15 -5.86 -5.53

250 -5.97 -5.66 -5.40 -5.09 -6.22 -5.90 -5.65 -5.35

500 -5.86 -5.57 -5.32 -5.04 -6.13 -5.82 -5.56 -5.28

4 25 -8.17 -7.52 -7.01 -6.47 -8.75 -8.07 -7.51 -6.94

50 -7.01 -6.57 -6.20 -5.81 -7.39 -6.93 -6.55 -6.14

100 -6.49 -6.13 -5.84 -5.50 -6.76 -6.39 -6.11 -5.77

250 -6.23 -5.90 -5.63 -5.33 -6.47 -6.14 -5.87 -5.58

500 -6.12 -5.83 -5.57 -5.28 -6.36 -6.05 -5.80 -5.51

Critical values for the multcointegration ADF statistic to test for Model 2. The

break fraction parameter has been imposed exogenously in the middel of the

sample size ( = Tb =n = 0:5). An intercept has been included in multicointe-

gration relation (mt = 1). The indices m1 and m2 indicate the number of I(1)

and I(2) variables, respectively. n indicates the sample size. The simulations

were based upon 50,000 replications.

47

Table 14: Critical values for Model 3 ( = 0:5) (mt = 0)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 25 -6.65 -6.09 -5.65 -5.16 -7.26 -6.65 -6.17 -5.66

50 -5.69 -5.32 -5.01 -4.66 -6.15 -5.72 -5.41 -5.04

100 -5.38 -5.02 -4.73 -4.42 -5.73 -5.36 -5.06 -4.74

250 -5.16 -4.84 -4.60 -4.31 -5.46 -5.15 -4.88 -4.60

500 -5.07 -4.78 -4.54 -4.26 -5.35 -5.07 -4.81 -4.53

1 25 -7.13 -6.50 -6.04 -5.54 -7.69 -7.05 -6.57 -6.02

50 -6.07 -5.66 -5.34 -4.98 -6.51 -6.06 -5.72 -5.34

100 -5.69 -5.34 -5.03 -4.72 -6.01 -5.63 -5.35 -5.02

250 -5.46 -5.13 -4.87 -4.59 -5.74 -5.41 -5.16 -4.86

500 -5.34 -5.07 -4.82 -4.54 -5.63 -5.32 -5.08 -4.79

2 25 -7.53 -6.90 -6.41 -5.89 -8.07 -7.43 -6.93 -6.38

50 -6.42 -6.01 -5.65 -5.28 -6.82 -6.38 -6.02 -5.63

100 -5.98 -5.62 -5.32 -4.99 -6.28 -5.92 -5.62 -5.29

250 -5.72 -5.41 -5.14 -4.85 -6.00 -5.67 -5.41 -5.11

500 -5.63 -5.32 -5.07 -4.79 -5.87 -5.58 -5.32 -5.04

3 25 -7.94 -7.30 -6.80 -6.25 -8.55 -7.83 -7.29 -6.72

50 -6.76 -6.32 -5.96 -5.57 -7.13 -6.69 -6.33 -5.92

100 -6.24 -5.90 -5.60 -5.26 -6.56 -6.20 -5.89 -5.54

250 -5.98 -5.66 -5.41 -5.10 -6.24 -5.92 -5.65 -5.35

500 -5.89 -5.58 -5.32 -5.04 -6.11 -5.81 -5.56 -5.27

4 25 -8.36 -7.69 -7.15 -6.58 -8.96 -8.24 -7.65 -7.05

50 -7.06 -6.62 -6.25 -5.85 -7.45 -6.97 -6.61 -6.19

100 -6.53 -6.16 -5.85 -5.52 -6.83 -6.45 -6.15 -5.80

250 -6.22 -5.90 -5.64 -5.35 -6.46 -6.15 -5.88 -5.58

500 -6.11 -5.82 -5.55 -5.27 -6.33 -6.04 -5.78 -5.50

Critical values for the multcointegration ADF statistic to test for Model 3.

The break fraction parameter has been imposed exogenously in the middel of

the sample size ( = Tb =n = 0:5). No deterministics have been included in

multicointegration relation (mt = 0). The indices m1 and m2 indicate the

number of I(1) and I(2) variables, respectively. n indicates the sample size.

The simulations were based upon 50,000 replications.

48

Table 15: Critical Values for Model 3 ( = 0:5) (mt = 1)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 25 -7.20 -6.61 -6.14 -5.66 -7.78 -7.17 -6.65 -6.12

50 -6.15 -5.76 -5.42 -5.04 -6.56 -6.13 -5.78 -5.40

100 -5.69 -5.36 -5.08 -4.77 -6.01 -5.66 -5.38 -5.06

250 -5.47 -5.17 -4.91 -4.62 -5.73 -5.43 -5.17 -4.88

500 -5.38 -5.10 -4.87 -4.57 -5.66 -5.35 -5.10 -4.83

1 25 -7.60 -6.98 -6.51 -5.99 -8.16 -7.52 -7.02 -6.47

50 -6.47 -6.05 -5.72 -5.33 -6.87 -6.42 -6.07 -5.67

100 -5.98 -5.63 -5.35 -5.03 -6.27 -5.92 -5.64 -5.32

250 -5.73 -5.41 -5.17 -4.87 -5.99 -5.67 -5.42 -5.13

500 -5.64 -5.35 -5.11 -4.83 -5.91 -5.60 -5.34 -5.06

2 25 -8.03 -7.36 -6.86 -6.33 -8.67 -7.91 -7.37 -6.80

50 -6.80 -6.37 -6.02 -5.63 -7.20 -6.75 -6.37 -5.97

100 -6.25 -5.90 -5.61 -5.29 -6.56 -6.20 -5.90 -5.57

250 -5.98 -5.67 -5.41 -5.12 -6.21 -5.92 -5.66 -5.37

500 -5.88 -5.59 -5.34 -5.07 -6.13 -5.84 -5.58 -5.29

3 25 -8.45 -7.75 -7.21 -6.66 -9.03 -8.30 -7.72 -7.12

50 -7.09 -6.65 -6.30 -5.90 -7.48 -7.02 -6.65 -6.23

100 -6.54 -6.18 -5.87 -5.54 -6.83 -6.45 -6.15 -5.82

250 -6.22 -5.92 -5.65 -5.34 -6.46 -6.14 -5.88 -5.59

500 -6.10 -5.82 -5.57 -5.29 -6.35 -6.05 -5.80 -5.51

4 25 -8.82 -8.12 -7.55 -6.98 -9.40 -8.65 -8.05 -7.44

50 -7.40 -6.94 -6.58 -6.17 -7.78 -7.29 -6.91 -6.48

100 -6.79 -6.42 -6.12 -5.78 -7.08 -6.70 -6.39 -6.05

250 -6.34 -6.03 -5.79 -5.51 -6.58 -6.27 -6.01 -5.73

500 -6.44 -6.15 -5.88 -5.58 -6.67 -6.37 -6.11 -5.81

Critical values for the multcointegration ADF statistic to test for Model 3. The

break fraction parameter has been imposed exogenously in the middel of the

sample size ( = Tb =n = 0:5). An intercept has been included in multicointe-

gration relation (mt = 1). The indices m1 and m2 indicate the number of I(1)

and I(2) variables, respectively. n indicates the sample size. The simulations

were based upon 50,000 replications.

49

Table 16: Critical values for Model 4 ( = 0:5) (mt = 0)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 25 -6.63 -6.02 -5.58 -5.09 -7.88 -7.23 -6.69 -6.14

50 -5.70 -5.28 -4.96 -4.59 -6.54 -6.12 -5.76 -5.37

100 -5.32 -4.98 -4.69 -4.37 -6.00 -5.65 -5.35 -5.02

250 -5.10 -4.80 -4.54 -4.25 -5.69 -5.38 -5.12 -4.84

500 -5.08 -4.76 -4.50 -4.22 -5.63 -5.34 -5.07 -4.78

1 25 -7.10 -6.47 -5.98 -5.47 -8.34 -7.61 -7.06 -6.49

50 -6.04 -5.62 -5.28 -4.92 -6.87 -6.43 -6.06 -5.66

100 -5.65 -5.28 -5.00 -4.67 -6.28 -5.92 -5.63 -5.30

250 -5.39 -5.09 -4.84 -4.54 -5.97 -5.65 -5.37 -5.08

500 -5.33 -5.03 -4.78 -4.50 -5.90 -5.59 -5.33 -5.03

2 25 -7.45 -6.85 -6.36 -5.83 -8.77 -8.02 -7.42 -6.84

50 -6.38 -5.96 -5.61 -5.22 -7.22 -6.73 -6.37 -5.95

100 -5.94 -5.59 -5.29 -4.96 -6.55 -6.19 -5.90 -5.56

250 -5.67 -5.36 -5.11 -4.82 -6.20 -5.90 -5.62 -5.32

500 -5.62 -5.30 -5.06 -4.77 -6.13 -5.83 -5.57 -5.28

3 25 -7.91 -7.26 -6.74 -6.19 -9.18 -8.43 -7.81 -7.18

50 -6.70 -6.28 -5.92 -5.53 -7.53 -7.02 -6.64 -6.23

100 -6.22 -5.87 -5.57 -5.24 -6.83 -6.45 -6.15 -5.81

250 -5.94 -5.63 -5.36 -5.07 -6.46 -6.14 -5.86 -5.55

500 -5.86 -5.56 -5.30 -5.02 -6.35 -6.04 -5.80 -5.50

4 25 -8.32 -7.62 -7.11 -6.54 -9.49 -8.77 -8.14 -7.50

50 -7.01 -6.58 -6.21 -5.83 -7.82 -7.31 -6.92 -6.50

100 -6.49 -6.13 -5.84 -5.50 -7.07 -6.70 -6.39 -6.05

250 -6.19 -5.87 -5.62 -5.31 -6.69 -6.36 -6.10 -5.79

500 -6.10 -5.80 -5.55 -5.26 -6.59 -6.28 -6.02 -5.73

Critical values for the multcointegration ADF statistic to test for Model 4.

The break fraction parameter has been imposed exogenously in the middel of

the sample size ( = Tb =n = 0:5). No deterministics have been included in

multicointegration relation (mt = 0). The indices m1 and m2 indicate the

number of I(1) and I(2) variables, respectively. n indicates the sample size.

The simulations were based upon 50,000 replications.

50

Table 17: Critical values for Model 4 ( = 0:5) (mt = 1)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 25 -7.14 -6.56 -6.08 -5.57 -8.38 -7.70 -7.16 -6.58

50 -6.10 -5.70 -5.36 -5.00 -6.90 -6.48 -6.11 -5.73

100 -5.70 -5.35 -5.06 -4.74 -6.30 -5.95 -5.67 -5.34

250 -5.45 -5.16 -4.89 -4.59 -6.00 -5.69 -5.42 -5.12

500 -5.36 -5.08 -4.82 -4.54 -5.90 -5.60 -5.34 -5.05

1 25 -7.55 -6.92 -6.44 -5.92 -8.76 -8.07 -7.51 -6.90

50 -6.43 -6.01 -5.67 -5.29 -7.21 -6.76 -6.39 -6.00

100 -5.96 -5.63 -5.34 -5.02 -6.58 -6.22 -5.92 -5.60

250 -5.72 -5.41 -5.15 -4.85 -6.25 -5.93 -5.66 -5.36

500 -5.65 -5.34 -5.08 -4.80 -6.15 -5.84 -5.58 -5.29

2 25 -7.93 -7.31 -6.80 -6.26 -9.15 -8.42 -7.83 -7.23

50 -6.75 -6.33 -5.97 -5.59 -7.52 -7.08 -6.69 -6.26

100 -6.24 -5.90 -5.61 -5.28 -6.82 -6.47 -6.17 -5.83

250 -5.99 -5.67 -5.40 -5.11 -6.50 -6.17 -5.90 -5.60

500 -5.88 -5.58 -5.33 -5.04 -6.37 -6.06 -5.81 -5.52

3 25 -8.32 -7.66 -7.15 -6.60 -9.55 -8.76 -8.17 -7.54

50 -7.06 -6.62 -6.26 -5.86 -7.82 -7.36 -6.97 -6.54

100 -6.51 -6.17 -5.87 -5.54 -7.06 -6.71 -6.41 -6.08

250 -6.21 -5.90 -5.64 -5.35 -6.69 -6.38 -6.11 -5.82

500 -6.11 -5.81 -5.56 -5.28 -6.60 -6.29 -6.03 -5.73

4 25 -8.69 -8.01 -7.50 -6.92 -9.90 -9.11 -8.51 -7.85

50 -7.35 -6.90 -6.54 -6.14 -8.09 -7.62 -7.23 -6.80

100 -6.76 -6.43 -6.12 -5.78 -7.29 -6.95 -6.64 -6.31

250 -6.46 -6.13 -5.88 -5.58 -6.90 -6.60 -6.33 -6.03

500 -6.35 -6.05 -5.80 -5.51 -6.79 -6.49 -6.23 -5.95

Critical values for the multcointegration ADF statistic to test for Model 4. The

break fraction parameter has been imposed exogenously in the middel of the

sample size ( = Tb =n = 0:5). An intercept has been included in multicointe-

gration relation (mt = 1). The indices m1 and m2 indicate the number of I(1)

and I(2) variables, respectively. n indicates the sample size. The simulations

were based upon 50,000 replications.

51

Table 18: Critical values for Model 5 ( = 0:5) (ct = 1 and mt = 1; DUt )

Probability of a smaller value

m2 = 1 m2 = 1

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 25 -5.81 -5.30 -4.92 -4.49 -6.41 -5.86 -5.43 -4.98

50 -5.19 -4.82 -4.50 -4.16 -5.62 -5.23 -4.91 -4.56

100 -4.89 -4.57 -4.31 -4.01 -5.28 -4.94 -4.67 -4.35

250 -4.78 -4.48 -4.22 -3.92 -5.11 -4.79 -4.53 -4.25

500 -4.71 -4.41 -4.17 -3.89 -5.04 -4.73 -4.48 -4.21

1 25 -6.71 -6.15 -5.72 -5.26 -7.29 -6.69 -6.23 -5.73

50 -5.95 -5.52 -5.21 -4.84 -6.32 -5.91 -5.57 -5.20

100 -5.59 -5.23 -4.96 -4.64 -5.87 -5.55 -5.27 -4.95

250 -5.41 -5.08 -4.83 -4.53 -5.67 -5.37 -5.11 -4.82

500 -5.34 -5.03 -4.78 -4.50 -5.62 -5.31 -5.06 -4.76

2 25 -7.62 -6.98 -6.49 -5.98 -8.12 -7.47 -6.96 -6.42

50 -6.63 -6.19 -5.83 -5.44 -6.98 -6.55 -6.18 -5.78

100 -6.18 -5.85 -5.55 -5.21 -6.47 -6.12 -5.82 -5.49

250 -5.92 -5.62 -5.36 -5.06 -6.15 -5.87 -5.61 -5.32

500 -5.87 -5.57 -5.31 -5.01 -6.10 -5.80 -5.55 -5.26

3 25 -8.46 -7.79 -7.22 -6.67 -8.99 -8.26 -7.70 -7.10

50 -7.25 -6.82 -6.43 -6.02 -7.59 -7.14 -6.77 -6.34

100 -6.74 -6.37 -6.07 -5.72 -7.01 -6.62 -6.31 -5.98

250 -6.39 -6.11 -5.85 -5.54 -6.63 -6.33 -6.08 -5.78

500 -6.33 -6.05 -5.78 -5.48 -6.55 -6.26 -6.00 -5.70

4 25 -9.27 -8.51 -7.95 -7.33 -9.72 -9.00 -8.38 -7.76

50 -7.83 -7.37 -6.98 -6.55 -8.19 -7.68 -7.30 -6.86

100 -7.21 -6.85 -6.54 -6.19 -7.48 -7.10 -6.78 -6.43

250 -6.86 -6.56 -6.29 -5.98 -7.09 -6.77 -6.51 -6.20

500 -6.76 -6.46 -6.21 -5.91 -6.96 -6.66 -6.40 -6.12

Critical values for the multcointegration ADF statistic to test for Model 5. The

break fraction parameter has been imposed exogenously in the middel of the

sample size ( = Tb =n = 0:5). An intercept has been included in cointegration

relation (ct = 1) and a broken intercept in multicointegration relation (mt =

1; DUt ). The indices m1 and m2 indicate the number of I(1) and I(2) variables,

respectively. n indicates the sample size. The simulations were based upon

50,000 replications.

52

Table 19: Critical values for Model 5 ( = 0:5) (ct = 1; t and mt = 1; t; DUt )

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 25 -6.48 -5.91 -5.47 -5.02 -7.07 -6.48 -6.02 -5.51

50 -5.68 -5.26 -4.96 -4.60 -6.11 -5.67 -5.34 -4.96

100 -5.33 -4.98 -4.70 -4.39 -5.64 -5.30 -5.02 -4.70

250 -5.15 -4.83 -4.58 -4.28 -5.44 -5.13 -4.87 -4.57

500 -5.08 -4.78 -4.52 -4.24 -5.35 -5.06 -4.81 -4.52

1 25 -7.34 -6.73 -6.24 -5.74 -7.91 -7.26 -6.76 -6.22

50 -6.39 -5.95 -5.59 -5.21 -6.77 -6.30 -5.96 -5.57

100 -5.92 -5.58 -5.29 -4.95 -6.22 -5.88 -5.58 -5.26

250 -5.71 -5.38 -5.12 -4.83 -5.95 -5.65 -5.40 -5.09

500 -5.60 -5.33 -5.07 -4.78 -5.86 -5.58 -5.32 -5.04

2 25 -8.12 -7.48 -6.98 -6.41 -8.72 -8.02 -7.47 -6.88

50 -7.01 -6.58 -6.19 -5.79 -7.40 -6.93 -6.54 -6.13

100 -6.47 -6.13 -5.83 -5.49 -6.75 -6.39 -6.10 -5.76

250 -6.22 -5.90 -5.63 -5.32 -6.47 -6.14 -5.87 -5.57

500 -6.13 -5.80 -5.56 -5.27 -6.35 -6.05 -5.79 -5.50

3 25 -8.93 -8.22 -7.67 -7.08 -9.52 -8.77 -8.17 -7.55

50 -7.60 -7.12 -6.76 -6.34 -7.99 -7.47 -7.07 -6.65

100 -6.97 -6.62 -6.31 -5.97 -7.24 -6.89 -6.58 -6.23

250 -6.69 -6.36 -6.09 -5.78 -6.91 -6.59 -6.31 -6.00

500 -6.55 -6.27 -6.00 -5.71 -6.77 -6.47 -6.22 -5.93

4 25 -9.74 -8.96 -8.37 -7.74 -10.32 -9.52 -8.85 -8.18

50 -8.18 -7.69 -7.28 -6.85 -8.50 -8.01 -7.60 -7.15

100 -7.45 -7.08 -6.78 -6.42 -7.74 -7.35 -7.02 -6.67

250 -7.12 -6.79 -6.50 -6.21 -7.33 -7.00 -6.72 -6.41

500 -6.97 -6.65 -6.40 -6.12 -7.17 -6.86 -6.61 -6.32

Critical values for the multcointegration ADF statistic to test for Model 5. The

break fraction parameter has been imposed exogenously in the middel of the

sample size ( = Tb =n = 0:5). An intercept and a trend have been included

in cointegration relation (ct = 1; t) and a broken trend in multicointegration

relation (mt = 1; DUt ). The indices m1 and m2 indicate the number of I(1)

and I(2) variables, respectively. n indicates the sample size. The simulations

were based upon 50,000 replications.

53

Table 20: Critical values for Model 6 ( = 0:5) (ct = 1 and mt = 1; DUt )

Probability of a smaller value

m2 = 1 m2 = 1

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 25 -6.47 -5.90 -5.46 -5.01 -7.75 -7.04 -6.56 -6.03

50 -5.67 -5.28 -4.94 -4.58 -6.91 -6.45 -6.10 -5.72

100 -5.34 -4.98 -4.70 -4.37 -6.33 -5.98 -5.67 -5.33

250 -5.11 -4.80 -4.54 -4.25 -5.97 -5.66 -5.40 -5.11

500 -5.05 -4.74 -4.50 -4.22 -5.90 -5.59 -5.33 -5.05

1 25 -7.34 -6.72 -6.24 -5.73 -8.51 -7.83 -7.30 -6.71

50 -6.78 -6.33 -5.97 -5.58 -7.52 -7.06 -6.67 -6.26

100 -6.23 -5.88 -5.60 -5.27 -6.83 -6.48 -6.18 -5.84

250 -5.96 -5.65 -5.40 -5.10 -6.47 -6.15 -5.87 -5.58

500 -5.88 -5.58 -5.32 -5.04 -6.35 -6.05 -5.79 -5.50

2 25 -8.16 -7.49 -6.95 -6.42 -9.34 -8.58 -7.99 -7.36

50 -7.35 -6.88 -6.52 -6.11 -8.11 -7.61 -7.21 -6.78

100 -6.77 -6.41 -6.10 -5.76 -7.34 -6.95 -6.66 -6.30

250 -6.44 -6.12 -5.86 -5.56 -6.92 -6.58 -6.31 -6.02

500 -6.34 -6.04 -5.77 -5.49 -6.76 -6.47 -6.21 -5.92

3 25 -8.95 -8.22 -7.69 -7.08 -10.11 -9.28 -8.63 -7.97

50 -7.94 -7.46 -7.07 -6.65 -8.66 -8.14 -7.73 -7.28

100 -7.25 -6.88 -6.57 -6.23 -7.79 -7.40 -7.09 -6.73

250 -6.88 -6.56 -6.29 -6.00 -7.32 -7.00 -6.73 -6.42

500 -6.78 -6.47 -6.22 -5.92 -7.18 -6.87 -6.62 -6.32

4 25 -9.80 -9.00 -8.40 -7.73 -11.03 -10.05 -9.36 -8.62

50 -8.48 -7.98 -7.59 -7.16 -9.22 -8.66 -8.23 -7.76

100 -7.74 -7.34 -7.02 -6.67 -8.23 -7.84 -7.51 -7.15

250 -7.30 -6.98 -6.70 -6.40 -7.72 -7.38 -7.12 -6.80

500 -7.17 -6.88 -6.61 -6.32 -7.55 -7.26 -7.00 -6.70

Critical values for the multcointegration ADF statistic to test for Model 6. The

break fraction parameter has been imposed exogenously in the middel of the

sample size ( = Tb =n = 0:5). An intercept has been included in cointegration

relation (ct = 1) and a broken intercept in multicointegration relation (mt =

1; DUt ). The indices m1 and m2 indicate the number of I(1) and I(2) variables,

respectively. n indicates the sample size. The simulations were based upon

50,000 replications.

54

Table 21: Critical Values for Model 6 ( = 0:5) (ct = 1; DUt and mt = 1; DUt )

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 25 -7.12 -6.55 -6.09 -5.58 -8.42 -7.72 -7.16 -6.59

50 -6.11 -5.70 -5.37 -5.00 -6.96 -6.49 -6.12 -5.73

100 -5.68 -5.33 -5.05 -4.73 -6.32 -5.95 -5.65 -5.31

250 -5.45 -5.14 -4.88 -4.59 -6.00 -5.68 -5.41 -5.12

500 -5.37 -5.08 -4.83 -4.56 -5.89 -5.59 -5.34 -5.06

1 25 -7.94 -7.33 -6.81 -6.26 -9.19 -8.44 -7.87 -7.26

50 -6.79 -6.34 -5.98 -5.59 -7.56 -7.09 -6.70 -6.28

100 -6.25 -5.88 -5.59 -5.26 -6.81 -6.46 -6.16 -5.82

250 -6.00 -5.68 -5.40 -5.09 -6.48 -6.18 -5.90 -5.59

500 -5.87 -5.59 -5.33 -5.05 -6.36 -6.06 -5.79 -5.51

2 25 -8.82 -8.10 -7.53 -6.93 -10.06 -9.19 -8.54 -7.87

50 -7.36 -6.94 -6.57 -6.14 -8.13 -7.63 -7.22 -6.80

100 -6.74 -6.39 -6.08 -5.75 -7.31 -6.92 -6.62 -6.28

250 -6.43 -6.13 -5.88 -5.56 -6.92 -6.60 -6.32 -6.01

500 -6.34 -6.04 -5.79 -5.50 -6.79 -6.48 -6.23 -5.93

3 25 -9.58 -8.84 -8.24 -7.58 -10.77 -9.87 -9.21 -8.51

50 -7.96 -7.49 -7.10 -6.67 -8.71 -8.19 -7.76 -7.30

100 -7.24 -6.87 -6.56 -6.22 -7.77 -7.39 -7.07 -6.72

250 -6.87 -6.57 -6.31 -6.00 -7.32 -7.00 -6.73 -6.42

500 -6.78 -6.46 -6.21 -5.92 -7.17 -6.87 -6.63 -6.33

4 25 -10.39 -9.58 -8.94 -8.23 -11.62 -10.64 -9.90 -9.15

50 -8.53 -8.01 -7.60 -7.16 -9.24 -8.70 -8.26 -7.78

100 -7.70 -7.33 -7.03 -6.67 -8.23 -7.83 -7.52 -7.15

250 -7.27 -6.97 -6.71 -6.41 -7.72 -7.39 -7.12 -6.81

500 -7.16 -6.85 -6.61 -6.31 -7.54 -7.24 -6.98 -6.70

Critical values for the multcointegration ADF statistic to test for Model 6. The

break fraction parameter has been imposed exogenously in the middel of the

sample size ( = Tb =n = 0:5). A broken intercept has been included in coin-

tegration relation (ct = 1; DU t) and a broken intercept in multicointegration

relation (mt = 1; DUt ). The indices m1 and m2 indicate the number of I(1)

and I(2) variables, respectively. n indicates the sample size. The simulations

were based upon 50,000 replications.

55

Table 22: Critical values for Model 2 ( unknown) (mt = 1)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 50 -6.62 -6.23 -5.92 -5.56 -7.05 -6.67 -6.33 -5.99

100 -6.18 -5.86 -5.56 -5.26 -6.55 -6.19 -5.92 -5.62

250 -5.94 -5.66 -5.41 -5.18 -6.28 -5.93 -5.73 -5.45

500 -5.90 -5.60 -5.37 -5.10 -6.17 -5.89 -5.67 -5.40

1 50 -7.00 -6.61 -6.30 -5.94 -7.43 -7.06 -6.67 -6.32

100 -6.53 -6.16 -5.90 -5.59 -6.90 -6.52 -6.21 -5.92

250 -6.22 -5.94 -5.72 -5.47 -6.57 -6.25 -6.00 -5.74

500 -6.15 -5.91 -5.69 -5.41 -6.42 -6.13 -5.95 -5.70

2 50 -7.40 -6.94 -6.61 -6.24 -7.77 -7.35 -7.01 -6.62

100 -6.80 -6.47 -6.21 -5.90 -7.12 -6.79 -6.50 -6.22

250 -6.55 -6.23 -6.00 -5.74 -6.85 -6.53 -6.28 -5.99

500 -6.44 -6.18 -5.94 -5.68 -6.73 -6.43 -6.23 -5.95

3 50 -7.71 -7.27 -6.93 -6.55 -8.12 -7.69 -7.35 -6.93

100 -7.07 -6.77 -6.51 -6.18 -7.44 -7.10 -6.79 -6.48

250 -6.80 -6.50 -6.26 -5.98 -7.08 -6.78 -6.52 -6.24

500 -6.75 -6.42 -6.17 -5.95 -6.97 -6.65 -6.45 -6.19

4 50 -8.05 -7.63 -7.28 -6.90 -8.45 -8.03 -7.65 -7.24

100 -7.36 -7.06 -6.77 -6.48 -7.72 -7.37 -7.07 -6.75

250 -7.03 -6.76 -6.49 -6.24 -7.28 -7.00 -6.74 -6.48

500 -6.95 -6.69 -6.45 -6.17 -7.17 -6.89 -6.66 -6.43

Critical values for the multcointegration ADF statitisc to test for Model 2. The

break fraction parameter has been endogenously estimated. An intercept has

been included in multicointegration relation (mt = 1). The indices m1 and m2

indicate the number of I(1) and I(2) variables, respectively. n indicates the

sample size.The simulations were based upon 5,000 replications.

56

Table 23: Critical values for Model 3 ( unknown) (mt = 1)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 50 -7.20 -6.68 -6.32 -5.94 -7.55 -7.17 -6.77 -6.37

100 -6.50 -6.19 -5.90 -5.60 -6.84 -6.55 -6.28 -5.95

250 -6.26 -5.94 -5.72 -5.45 -6.56 -6.27 -6.02 -5.75

500 -6.14 -5.92 -5.68 -5.43 -6.45 -6.18 -5.94 -5.69

1 50 -7.48 -7.04 -6.68 -6.29 -7.93 -7.51 -7.15 -6.73

100 -6.81 -6.49 -6.23 -5.90 -7.16 -6.84 -6.56 -6.24

250 -6.53 -6.24 -5.99 -5.74 -6.80 -6.55 -6.27 -6.00

500 -6.44 -6.18 -5.96 -5.71 -6.72 -6.44 -6.20 -5.96

2 50 -7.83 -7.34 -7.02 -6.62 -8.16 -7.81 -7.44 -7.01

100 -7.12 -6.77 -6.52 -6.22 -7.43 -7.08 -6.82 -6.50

250 -6.75 -6.52 -6.27 -5.98 -7.06 -6.77 -6.55 -6.25

500 -6.71 -6.48 -6.22 -5.97 -6.94 -6.67 -6.44 -6.19

3 50 -8.17 -7.66 -7.33 -6.93 -8.49 -8.12 -7.75 -7.31

100 -7.43 -7.05 -6.75 -6.47 -7.80 -7.37 -7.08 -6.75

250 -7.00 -6.77 -6.51 -6.25 -7.31 -7.01 -6.78 -6.50

500 -6.98 -6.66 -6.43 -6.18 -7.17 -6.88 -6.65 -6.41

4 50 -8.52 -8.02 -7.65 -7.24 -8.85 -8.46 -8.04 -7.63

100 -7.75 -7.33 -7.04 -6.72 -8.00 -7.66 -7.31 -7.01

250 -7.24 -6.95 -6.75 -6.47 -7.57 -7.25 -7.00 -6.72

500 -7.23 -6.93 -6.67 -6.42 -7.42 -7.11 -6.88 -6.63

Critical values for the multcointegration ADF statitisc to test for Model 3. The

break fraction parameter has been endogenously estimated. An intercept has

been included in multicointegration relation (mt = 1). The indices m1 and m2

indicate the number of I(1) and I(2) variables, respectively. n indicates the

sample size.The simulations were based upon 5,000 replications.

57

Table 24: Critical values for Model 4 ( unknown) (mt = 1)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 50 -6.93 -6.50 -6.16 -5.80 -7.68 -7.26 -6.92 -6.54

100 -6.36 -6.06 -5.76 -5.49 -7.01 -6.66 -6.41 -6.10

250 -6.16 -5.86 -5.64 -5.37 -6.71 -6.41 -6.15 -5.86

500 -6.08 -5.77 -5.55 -5.29 -6.63 -6.28 -6.07 -5.81

1 50 -7.24 -6.88 -6.53 -6.18 -8.16 -7.68 -7.29 -6.88

100 -6.77 -6.41 -6.13 -5.80 -7.37 -6.98 -6.71 -6.40

250 -6.48 -6.18 -5.94 -5.68 -6.95 -6.67 -6.44 -6.16

500 -6.35 -6.06 -5.86 -5.58 -6.83 -6.55 -6.31 -6.06

2 50 -7.62 -7.22 -6.87 -6.53 -8.51 -8.01 -7.63 -7.20

100 -7.11 -6.71 -6.44 -6.12 -7.68 -7.28 -6.99 -6.68

250 -6.69 -6.40 -6.21 -5.93 -7.21 -6.92 -6.68 -6.40

500 -6.62 -6.33 -6.11 -5.88 -7.06 -6.80 -6.57 -6.32

3 50 -8.05 -7.56 -7.21 -6.84 -8.88 -8.36 -7.93 -7.52

100 -7.38 -7.00 -6.71 -6.41 -7.94 -7.60 -7.26 -6.93

250 -7.00 -6.71 -6.46 -6.22 -7.46 -7.16 -6.92 -6.64

500 -6.88 -6.61 -6.39 -6.12 -7.27 -7.01 -6.79 -6.53

4 50 -8.50 -7.86 -7.54 -7.17 -9.21 -8.70 -8.28 -7.82

100 -7.63 -7.28 -6.98 -6.68 -8.20 -7.83 -7.51 -7.19

250 -7.28 -6.99 -6.72 -6.46 -7.71 -7.43 -7.17 -6.88

500 -7.05 -6.84 -6.61 -6.36 -7.50 -7.24 -7.01 -6.75

Critical values for the multcointegration ADF statitisc to test for Model 4. The

break fraction parameter has been endogenously estimated. An intercept has

been included in multicointegration relation (mt = 1). The indices m1 and m2

indicate the number of I(1) and I(2) variables, respectively. n indicates the

sample size.The simulations were based upon 5,000 replications.

58

Table 25: Critical values for Model 5 ( unknown) (ct = 1; t and mt = 1; DUt ; t)

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 50 -6.54 -6.18 -5.88 -5.54 -7.01 -6.60 -6.28 -5.92

100 -6.17 -5.80 -5.58 -5.29 -6.52 -6.20 -5.92 -5.63

250 -5.94 -5.67 -5.43 -5.16 -6.20 -5.97 -5.73 -5.45

500 -5.79 -5.55 -5.32 -5.10 -6.15 -5.84 -5.64 -5.39

1 50 -7.31 -6.89 -6.52 -6.21 -7.77 -7.27 -6.96 -6.59

100 -6.81 -6.52 -6.23 -5.88 -7.13 -6.82 -6.53 -6.19

250 -6.60 -6.30 -6.03 -5.76 -6.83 -6.54 -6.29 -6.00

500 -6.38 -6.14 -5.95 -5.67 -6.66 -6.38 -6.18 -5.94

2 50 -7.97 -7.55 -7.19 -6.79 -8.38 -7.94 -7.55 -7.15

100 -7.39 -7.01 -6.75 -6.44 -7.71 -7.34 -7.07 -6.73

250 -7.18 -6.83 -6.54 -6.25 -7.37 -7.03 -6.75 -6.47

500 -6.90 -6.66 -6.40 -6.16 -7.16 -6.87 -6.65 -6.39

3 50 -8.66 -8.15 -7.81 -7.35 -9.04 -8.57 -8.17 -7.73

100 -7.92 -7.52 -7.25 -6.91 -8.19 -7.83 -7.53 -7.20

250 -7.52 -7.23 -6.97 -6.67 -7.70 -7.42 -7.17 -6.91

500 -7.37 -7.08 -6.88 -6.60 -7.57 -7.28 -7.06 -6.83

4 50 -9.24 -8.70 -8.32 -7.86 -9.68 -9.10 -8.67 -8.23

100 -8.38 -8.06 -7.74 -7.38 -8.63 -8.30 -8.01 -7.65

250 -7.88 -7.63 -7.38 -7.10 -8.07 -7.82 -7.59 -7.31

500 -7.76 -7.47 -7.23 -6.99 -7.97 -7.64 -7.42 -7.18

Critical values for the multcointegration ADF statitisc to test for Model 5.

The break fraction parameter has been endogenously estimated. An intercept

has been included in cointegration relation (ct = 1) and a broken trend in

multicointegration relation (mt = 1; DUt ; t). The indices m1 and m2 indicate

the number of I(1) and I(2) variables, respectively. n indicates the sample

size.The simulations were based upon 5,000 replications.

59

Table 26: Critical values for Model 6 ( unknown) (ct = 1; DUt and mt =

1; DUt )

Probability of a smaller value

m2 = 1 m2 = 2

m1 n 0:01 0:025 0:05 0:10 0:01 0:025 0:05 0:10

0 50 -6.85 -6.48 -6.15 -5.79 -7.61 -7.18 -6.85 -6.47

100 -6.48 -6.13 -5.86 -5.52 -7.08 -6.70 -6.43 -6.09

250 -6.13 -5.87 -5.63 -5.36 -6.61 -6.36 -6.11 -5.86

500 -6.06 -5.82 -5.55 -5.32 -6.55 -6.25 -6.06 -5.81

1 50 -7.52 -7.09 -6.77 -6.35 -8.24 -7.80 -7.41 -7.02

100 -6.97 -6.66 -6.38 -6.06 -7.53 -7.21 -6.90 -6.59

250 -6.67 -6.37 -6.14 -5.86 -7.14 -6.85 -6.56 -6.31

500 -6.52 -6.31 -6.06 -5.80 -6.97 -6.73 -6.51 -6.25

2 50 -8.21 -7.74 -7.34 -6.89 -8.97 -8.44 -7.98 -7.55

100 -7.50 -7.12 -6.84 -6.54 -8.01 -7.68 -7.40 -7.06

250 -7.15 -6.86 -6.60 -6.30 -7.60 -7.29 -7.04 -6.75

500 -6.94 -6.74 -6.49 -6.23 -7.43 -7.16 -6.92 -6.67

3 50 -8.74 -8.28 -7.88 -7.43 -9.51 -8.99 -8.54 -8.06

100 -8.01 -7.62 -7.32 -7.00 -8.49 -8.10 -7.84 -7.51

250 -7.55 -7.27 -7.02 -6.73 -8.03 -7.72 -7.44 -7.15

500 -7.41 -7.12 -6.89 -6.63 -7.84 -7.52 -7.30 -7.03

4 50 -9.31 -8.78 -8.41 -7.98 -10.01 -9.49 -9.10 -8.59

100 -8.47 -8.06 -7.78 -7.43 -8.98 -8.61 -8.25 -7.92

250 -7.95 -7.67 -7.40 -7.16 -8.41 -8.10 -7.82 -7.55

500 -7.87 -7.53 -7.31 -7.03 -8.18 -7.93 -7.67 -7.39

Critical values for the multcointegration ADF statitisc to test for Model 6. The

break fraction parameter has been endogenously estimated. A broken intercept

has been included in both cointegration and multicointegration relation (c1 =

1; DUt and mt = 1). The indices m1 and m2 indicate the number of I(1) and

I(2) variables, respectively. n indicates the sample size.The simulations were

based upon 5,000 replications.

60

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