Tests for Cointegration Based on Canonical Correlation Analysis

Abstract

Critical values are provided for four new tests for cointegration based on the canonical correlations and variates of a development of the Box-Tiao procedure. It is found that in finite samples the power of three of these tests, unlike the power of Johansen's and Engle and Yoo's tests, is highly robust to the correlation between the disturbances in the cointegrating relationships and those generating the common trends. The proposed tests perform well against these alternatives, but neither set of tests dominates over the entire parameter space.

Key Words:

• Maximum likelihood
• Monte Carlo
• Unit roots
• Vector autoregression