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DETECTION OF FUNCTIONAL FORM MISSPECIFICATION IN COINTEGRATING RELATIONS

Published online by Cambridge University Press:  09 July 2008

Ioannis Kasparis
Ioannis Kasparis*
Affiliation:
University of Cyprus
*
Address correspondence to Ioannis Kasparis, Department of Economics, School of Economics and Management, University of Cyprus, P.O. Box 20537, Nicosia CY-1678, Cyprus; e-mail: kasparis@ucy.ac.cy
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Abstract

A simple specification test based on fully modified residuals and the cumulative sum (CUSUM) test for cointegration of Xiao and Phillips (2002, Journal of Econometrics, 108, 43–61) are considered as means of testing for functional form in long-run cointegrating relations. It is shown that both tests are consistent under functional form misspecification and lack of cointegration. A simulation experiment is carried out to assess the properties of the tests in finite samples. The Dickey–Fuller test is also considered. The simulation results reveal that the first two tests perform reasonably well. However, the Dickey–Fuller test performs poorly under functional form misspecification.

Type
Research Article
Information
Econometric Theory , Volume 24 , Issue 5 , October 2008 , pp. 1373 - 1403
Copyright
Copyright © Cambridge University Press 2008

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