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Activity Number: 365
Type: Contributed
Date/Time: Tuesday, August 2, 2016 : 10:30 AM to 12:20 PM
Sponsor: Business and Economic Statistics Section
Abstract #318829 View Presentation
Title: LM Cointegration Tests Allowing for an Unknown Number of Breaks: Implications for the Forward Rate Unbiasedness Hypothesis
Author(s): Dong-Yop Oh and Hyejin Lee*
Companies: The University of Texas Rio Grande Valley and The University of Texas Rio Grande Valley
Keywords: LM cointegration test ; Structural changes ; Forward rate unbiased hypothesis

This study extends the Lagrange multiplier (LM) cointegration test developed by Westerlund and Edgerton (WE; 2006) by allowing for an unknown number of breaks. Monte Carlo simulations provide two main results. First, a loss of power in the LM cointegration tests is detected when potential breaks are ignored. Second, the modified testing procedures do not affect to the asymptotic distribution and major properties of the tests of WE under the null, but reasonably increase their testing power in presence of multiple breaks. We also provide empirical applications of the proposed tests for the forward rate unbiasedness hypothesis (FRUH). The results reveal that the FRUH does hold when the effects of the multiple structural breaks are taken into account.

Authors who are presenting talks have a * after their name.

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