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On the Validity of Tests for Asymmetry in Residual-Based Threshold Cointegration Models

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Department of Statistics, Philipps-University of Marburg, Universitätsstraße 25, 35037 Marburg, Germany
2
Core Facility Hohenheim, University of Hohenheim, Schloss Hohenheim 1 C, 70593 Stuttgart, Germany
*
Author to whom correspondence should be addressed.
Econometrics 2019, 7(1), 12; https://doi.org/10.3390/econometrics7010012
Received: 1 August 2018 / Revised: 16 January 2019 / Accepted: 7 March 2019 / Published: 13 March 2019
(This article belongs to the Special Issue Resampling Methods in Econometrics)
This paper investigates the properties of tests for asymmetric long-run adjustment which are often applied in empirical studies on asymmetric price transmissions. We show that substantial size distortions are caused by preconditioning the test on finding sufficient evidence for cointegration in a first step. The extent of oversizing the test for long-run asymmetry depends inversely on the power of the primary cointegration test. Hence, tests for long-run asymmetry become invalid in cases of small sample sizes or slow speed of adjustment. Further, we provide simulation evidence that tests for long-run asymmetry are generally oversized if the threshold parameter is estimated by conditional least squares and show that bootstrap techniques can be used to obtain the correct size. View Full-Text
Keywords: asymmetric price transmission; bootstrap; MTAR; residual-based; SETAR; threshold cointegration asymmetric price transmission; bootstrap; MTAR; residual-based; SETAR; threshold cointegration
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Schild, K.-H.; Schweikert, K. On the Validity of Tests for Asymmetry in Residual-Based Threshold Cointegration Models. Econometrics 2019, 7, 12.

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