Tests for cointegration with two unknown regime shifts with an application to financial market integration |
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Authors: | Abdulnasser Hatemi-J |
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Institution: | 1. Department of Business and Management, University of Kurdistan-Hawler, P. O. Box 408, 541 28, Sk?vde, Sweden 2. Department of Economics, University of Sk?vde, P. O. Box 408, 541 28, Sk?vde, Sweden 3. School of Accounting, Economics and Finance, Faculty of Business and Law Deakin University, 221 Burwood Highway, Burwood, VIC, 3125, Australia
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Abstract: | It is widely agreed in empirical studies that allowing for potential structural change in economic processes is an important
issue. In existing literature, tests for cointegration between time series data allow for one regime shift. This paper extends
three residual-based test statistics for cointegration to the cases that take into account two possible regime shifts. The
timing of each shift is unknown a priori and it is determined endogenously. The distributions of the tests are non-standard.
We generate new critical values via simulation methods. The size and power properties of these test statistics are evaluated
through Monte Carlo simulations, which show the tests have small size distortions and very good power properties. The test
methods introduced in this paper are applied to determine whether the financial markets in the US and the UK are integrated.
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Keywords: | Structural break Cointegration Size Power Monte Carlo simulations |
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