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Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified

Published online by Cambridge University Press:  11 February 2009

Michael T.K. Horvath  and
Mark W. Watson
Michael T.K. Horvath
Affiliation:
Stanford University
Mark W. Watson
Affiliation:
Princeton University
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Abstract

Many economic models imply that ratios, simple differences, or “spreads” of variables are I(0). In these models, cointegrating vectors are composed of 1's, 0's, and —1's and contain no unknown parameters. In this paper, we develop tests for cointegration that can be applied when some of the cointegrating vectors are prespecified under the null or under the alternative hypotheses. These tests are constructed in a vector error correction model and are motivated as Wald tests from a Gaussian version of the model. When all of the cointegrating vectors are prespecified under the alternative, the tests correspond to the standard Wald tests for the inclusion of error correction terms in the VAR. Modifications of this basic test are developed when a subset of the cointegrating vectors contain unknown parameters. The asymptotic null distributions of the statistics are derived, critical values are determined, and the local power properties of the test are studied. Finally, the test is applied to data on foreign exchange future and spot prices to test the stability of the forward–spot premium.

Type
Articles
Information
Econometric Theory , Volume 11 , Issue 5 , October 1995 , pp. 984 - 1014
Copyright
Copyright © Cambridge University Press 1995

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