The effect of data transformation on common cycle,cointegration, and unit root tests: Monte Carlo results and a simple test |
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Authors: | Valentina Corradi Norman R. Swanson |
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Affiliation: | 1. Department of Economics, Queen Mary, University of London, Mile End Road, London E1 4NS, UK;2. Department of Economics, Rutgers University, 75 Hamilton Street, New Brunswick, NJ 08901, USA |
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Abstract: | Cointegration, common cycle, and related tests statistics are often constructed using logged data, even without clear reason why logs should be used rather than levels. Unfortunately, it is also the case that standard data transformation tests, such as those based on Box–Cox transformations, cannot be shown to be consistent unless assumptions concerning whether variables I(0) or I(1) are made. In this paper, we propose a simple randomized procedure for choosing between levels and log-levels specifications in the (possible) presence of deterministic and/or stochastic trends, and discuss the impact of incorrect data transformation on common cycle, cointegration and unit root tests. |
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Keywords: | C12 C22 |
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