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A STATISTICAL ANALYSIS OF MULTICOINTEGRATION

RELATIONSHIPS WITH REGIME SHIFTS

Vanessa Berenguer-Rico
Josep Llus Carrion-i-Silvestre

Grupo de investigacin AQR


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

In this paper we model the multicointegration relation proposed by Granger


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.

Keywords: Multicointegration; Structural breaks; I(2) processes; ADF test;


Life-cycle hypothesis
JEL classication: C12; C22

The authors gratefully acknowledge the nancial support of the Ministerio


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

Before proceeding we will give a formal denition of multicointegration as in


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 The models and preliminary theory


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.

Model 1: Standard multicointegration

We know that cointegration is a necessary condition for the presence of


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)

where fmt g11 is the s1 -dimensional deterministic sequence without structural


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.

Model 2: Level shift in cointegration relation

We introduce the rst structural change in the rst level of cointegration as


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.

Model 3: Level shift with trend in cointegration relation

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.

Model 4: Regime shift in cointegration relation

Now, as in Model 4 of Gregory and Hansen (1996), we allow for a level


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)

and the corresponding single equation multicointegration model when St =


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.

Model 5: Regime shifts in multicointegration relation

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

Yt = 0 Cmt + 0 Xt + 01 xt + 02 xt DUt + ut ; (13)


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.

Model 6: General model. Regime shifts in both cointegration and


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.

3.2 Preliminary theory. The underlying stochastic as-


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)

Xtm = (Cmt 0 ; xt 0 ; Xt 0 )0 ; (18)


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 ) :

Bn (r; ) ) B(r; ) BM ( ; ) as n ! 1; (26)

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

D0 = diagfne1 ; ne2 ; :::; nem0 g:

In addition, we can use the previous matrix to dene another normalizing m m


diagonal matrix, that is

Dn = diagfD0 ; n1=2 ; :::; n1=2 ; :::; n3=2 ; :::n3=2 g;

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

Dn 1 zt = zt = (Cmt 0 ; x0t 0 ; Xt0 0 )0 ;

where an underlined deterministic or stochastic process indicate that the process


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

G being an m m matrix. Then, it follows that

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,

z [T r] ) (f (r; )0 ; B10 (r; ); B20 (r; ))0 B (r; );

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

Proof. See Appendix.


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.

4 Asymptotics of Least Squares Estimation

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

(i) Ordinary least squares estimator


1
P
n P
n
^= Xtm Xtm0 Xtm Yt
t=1 t=1

(ii) The F test statistic for testing linear restrictions


" # 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

(iii) The coe cient of multiple correlation


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.

Theorem 1. Let the data-generating process be (17)-(21) and consider the


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:

(i) Coe cient estimates


1
R1 R1
n 1=2 d
Dn G( ^ )) B ( )B ( ) 0
B ( )Vd + vd ;
0 0

where Vd is dened as the limiting process of Yt conditional on Xtm , i.e., ut ,


when this is integrated of order d.

For d=0, V0 = dB0 ( ) and v0 = (00 ; (1 ) 010 ; 00 )0 .


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

(ii) The F test statistics


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

F ( ^ ) ! 1 of order Op (n) for d=1,2.

14
(iii) Durbin-Watson statistic

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

(iv) Coe cient of multiple correlation


By assuming that Yt is not dominated by higher-order deterministic
trends, we have:

R2 ! 1 of order Op (n 3 ), Op (n 2 ) for d=0, d=1, respectively.


R2 has a nondegenerate limiting distribution for d=2.

Proof. By using Lemma 1 the proof is entirely analogous to Haldrup (1994).

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.

5 Testing for multicointegration with regime shifts

In this section we provide the asymptotic properties of residual-based Dickey-


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.

5.1 The break point is assumed to be known

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

we know that for d = 1, i.e. under the null hypothesis


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:

Theorem 3 Let Yt be generated according to (17)-(21) and (25) with d = 1 and


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

Proof. By using Lemma1 and 2 the proof is entirely analogous to that of


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)

Model 5 have been specied with general broken deterministic components in


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.

5.2 The break point has to be estimated

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

which test the null of non-multicointegration against the alternative of multi-


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.

Theorem 4 Let Yt be generated according to (17)-(21) and (25) with d = 1


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.

6 Finite sample performance


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.

6.1 The power of multicointegration tests


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

xt = AWt + x1t yt = Wt + y1t ; (43)

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

and to be cointegrated with either xt or yt it is necessary that this variable has


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

xt = AWt + 1 Wt + x2t yt = W t + 2 Wt + y2t ; (44)

where x2t , y2t are both I(-1).


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

w1t = 1 w1t 1 + "1t w2t = 2 w2t 1 + "2t :

If now we dene x1t , y1t in (43) and x2t , y2t in (44) as

xit = w1t yit = w2t i = 1; 2

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

Quadratic trend case


1 = 0=0 1 = 2 =0
n 1 = 2=1 1 = 0 = 0:01 1 = 0 = 0:5 1 = 0=1
50 0.058 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

and dening 1 = 2 = 0, we obtain


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

Yt = 1 + 0:02t + 0:01t2 + 3DUt + 0:06DTt + 2Yt + 0:1Yt DUt + 1:5xt + xt DUt + ut

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.

6.2 Precision in break point estimation


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.

7 Selecting the model


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);

which is a polynomial cointegrated or fully cointegrated system.


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.

Table 10: ADF test for multicointegration with regime shifts


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

9 Some concluding remarks


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