Comparing Cointegration Tests in Presence of Structural Breaks
Engle Granger and Gregory Hansen Tests
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Cointegration analysis is a method developed for revealing whether there is a long term linear relation between more than one time series. Structural breaks may occur in the data generating processes of the time series due to reasons such as policy change, financial crisis and natural disasters. Not including the structural breaks into the analysis, in time series analysis, may cause the unit root and cointegration tests to give incorrect results. These results decrease the power of the test used. The widely used Dickey-Fuller unit root test and Engle-Granger and Johansen Cointegration tests m...
Cointegration analysis is a method developed for revealing whether there is a long term linear relation between more than one time series. Structural breaks may occur in the data generating processes of the time series due to reasons such as policy change, financial crisis and natural disasters. Not including the structural breaks into the analysis, in time series analysis, may cause the unit root and cointegration tests to give incorrect results. These results decrease the power of the test used. The widely used Dickey-Fuller unit root test and Engle-Granger and Johansen Cointegration tests may have erroneous results since they investigate the unit root and long term relation without considering structural breaks. The study gives brief information on the Zivot and Andrews and Perron (1989) unit root tests and Gregory-Hansen (G-H) cointegration test, which have been developed to avoid the incorrect results. A comparison of Engle-Granger (E-G) test, which investigates long term relations without taking structural breaks into consideration, and Gregory-Hansen test, which does the same taking the breaks into consideration, is conducted.
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