Faculty of Economics and Business Administration Publications Database

A Residual-Based LM-Type Test against Fractional Cointegration

Breitung, Jörg
Volume: 22
Number: 6
Pages: 1091 - 1111
Month: December
ISSN-Print: 0266-4666
Link External Source: Online Version
Year: 2006
Abstract: Nonstationary integrated time series may be fractionally cointegrated. Here we propose a test for the null hypothesis of no cointegration. It builds on the asymptotically normal Lagrange multiplier (LM) test against fractional alternatives applied to single equation residuals. It is shown that the LM test applied naively to residuals from a static level regression does not retain asymptotic normality. However, when the LM statistic is employed with residuals from a regression of differenced variables, then the test statistic is shown to have a standard normal limiting distribution. Monte Carlo experiments establish its relevance in finite samples.