Finance and Financial Management Commons^™

A Comparison Between Tests For Changes In The Adjustment Coefficients In Cointegrated Systems, Marco R. Barassi, Guglielmo Maria Caporale, Stephen G. Hall

CRIF Seminar series

In this paper we examine several approaches to detecting changes in the adjustment coefficients in cointegrated VARs. We adopt recursive and rolling techniques as mis-specification tests for the detection of non-constancy and the estimation of the breakpoints. We find that inspection of the recursive eigenvalues is not useful to detect a break in the adjustment coefficients, whilst recursive estimation of the coefficients can only indicate non-constancy, but not the exact breakpoint. Rolling estimation is found to perform better in detecting non-constancy in the parameters and their true value after the breakpoint. However, it only detects a region where the break …