Bootstrap Co-integration Rank Testing: The Effect of Bias-Correcting Parameter Estimates


Cavaliere, Giuseppe ; Taylor, A. M. Robert ; Trenkler, Carsten


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URL: https://ub-madoc.bib.uni-mannheim.de/32993
URN: urn:nbn:de:bsz:180-madoc-329935
Document Type: Working paper
Year of publication: 2013
The title of a journal, publication series: Working Paper Series
Volume: 13-06
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > VWL, Empirische Wirtschaftsforschung (Trenkler)
MADOC publication series: Department of Economics > Working Paper Series
Subject: 330 Economics
Classification: JEL: C30 , C32,
Keywords (English): Co-integration , trace test , bias-correction , bootstrap
Abstract: In this paper we investigate bootstrap-based methods for bias-correcting the first-stage parameter estimates used in some recently developed bootstrap implementations of the co-integration rank tests of Johansen (1996). In order to do so we adapt the framework of Kilian (1998) which estimates the bias in the original parameter estimates using the average bias in the corresponding parameter esti- mates taken across a large number of auxiliary bootstrap replications. A number of possible implementations of this procedure are discussed and concrete recommendations made on the basis of finite sample performance evaluated by Monte Carlo simulation methods. Our results show that bootstrap-based bias-correction methods can significantly improve upon the small sample performance of the bootstrap co-integration rank tests. A brief application of the techniques developed in this paper to international dynamic consumption risk sharing within Europe is also considered.

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