Monitoring stationarity and cointegration
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Date
2014-06-16
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Abstract
We propose a monitoring procedure to detect a structural change from stationary to integrated
behavior. When the procedure is applied to the residuals of a relationship between
integrated series it thus monitors a structural change from a cointegrating relationship
to a spurious relationship. The cointegration monitoring procedure is based on residuals
from modified least squares estimation, using either Fully Modifi ed, Dynamic or Integrated
Modified OLS. The procedure is inspired by Chu et al. (1996) in that it is based
on parameter estimation on a pre-break \calibration" period only rather than being based
on sequential estimation over the full sample. We investigate the asymptotic behavior of
the procedures under the null, for ( fixed and local) alternatives and in case of parameter
changes. We also study the finite sample performance via simulations. An application to
credit default swap spreads illustrates the potential usefulness of the procedure.
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Keywords
cointegration, unit roots, structural change, stationarity, monitoring