Testing for nonlinear cointegration under heteroskedasticity

Abstract

This article discusses cointegration tests for nonlinear cointegration in the presence of variance breaks in the errors. We build on approaches of Cavaliere and Taylor (2006, Journal of Time Series Analysis) for heteroskedastic cointegration tests and of Choi and Saikkonen (2010, Econometric Theory) for nonlinear cointegration tests. We propose a bootstrap test and prove its consistency. A Monte Carlo study shows the approach to have appealing finite sample properties and to work better than an approach using subresiduals. We provide an empirical application to the environmental Kuznets curves (EKC), finding that the cointegration tests do not reject the EKC hypothesis in most cases.