COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1404

End-of-Sample Cointegration Breakdown Tests

Donald W.K. Andrews and Jae-Young Kim

March 2003

This paper introduces tests for cointegration breakdown that may occur over a relatively short time period, such as at the end of the sample. The breakdown may be due to a shift in the cointegrating vector or due to a shift in the errors from being I(0) to being I(1). Tests are introduced based on the post-breakdown sum of squared residuals and the post-breakdown sum of squared reverse partial sums of residuals. Critical values are provided using a parametric subsampling method.

The regressors in the model are taken to be arbitrary linear combinations of deterministic, stationary, and integrated random variables. The tests are asymptotically valid when the number of observations in the breakdown period, m, is fixed and finite as the total sample size, T + m, goes to infinity. The tests are asymptotically valid under weak conditions.

Simulation results indicate that the tests work well in the scenarios considered.

Use of the tests is illustrated by testing for interest rate parity breakdown during the Asian financial crisis of 1997.

Keywords: Cointegration, least squares estimator, model breakdown, parameter change test, structural change

JEL Classification: C12, C52