A simple method for testing cointegration subject to regime

• Author(s): Gabriel, Vasco J. ; Sola, Martin ; Psaradakis, Zacharias
• Date: 2001
• Persistent ID: http://hdl.handle.net/1822/1440
• Origin: RepositóriUM - Universidade do Minho
• Subject(s): Cointegration; Markov switching; Standardized residuals
• Document Type: Research paper
• Language: English

Description

In this paper, we propose a simple method for testing cointegration in models that allow for multiple shifts in the long run relationship. The procedure consists of computing conventional residual-based tests with standardized residuals from Markov switching estimation. No new critical values are needed. An empirical application to the present value model of stock prices is presented, complemented by a small Monte Carlo experiment.