The Power of the KPSS-Test for Cointegration when Residuals are Fractionally Integrated

Abstract

We show that the power of the KPSS-test against integration, as measured by divergence rates of the test statistic under the alternative, remains the same when residuals from an OLS-regression rather than true observations are used. This is in stark contrast to residual based tests of the null of integration in a cointegration setting, where power is drastically reduced when residuals are used.