Testing Linearity in Cointegrating Relations With an Application to Purchasing Power Parity

• Main Authors: HONG, Seong Hyun, Peter C. B. PHILLIPS
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Noncentral chi(2) distribution; Nonlinear cointegration; RESET test; Specification test; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1812; https://ink.library.smu.edu.sg/context/soe_research/article/2811/viewcontent/Testing_Linearity_Cointegrating_PPP_av.pdf
• Institution: Singapore Management University

This article shows that when applied to nonstationary time series, the conventional Regression Error Specification Test (RESET) leads to severe size distortion and its asymptotic distribution involves a mixture of noncentral chi(2) distributions. Nonstationarity introduces bias terms in the limit di...