Econometrica: Sep, 2002, Volume 70, Issue 5

A Small Sample Correction for the Test of Cointegrating Rank in the Vector Autoregressive Model

https://doi.org/10.1111/1468-0262.00358
p. 1929-1961

Søren Johansen

With the cointegration formulation of economic long–run relations the test for cointegrating rank has become a useful econometric tool. The limit distribution of the test is often a poor approximation to the finite sample distribution and it is therefore relevant to derive an approximation to the expectation of the likelihood ratio test for cointegration in the vector autoregressive model in order to improve the finite sample properties. The correction factor depends on moments of functions of the random walk, which are tabulated by simulation, and functions of the parameters, which are estimated. From this approximation we propose a correction factor with the purpose of improving the small sample performance of the test. The correction is found explicitly in a number of simple models and its usefulness is illustrated by some simulation experiments.