Amsterdam Econometrics Seminars and Workshop Series

Alexey Onatskiy (University of Cambridge, United Kingdom)
Friday, 8 April 2016

We study the asymptotic behavior of Johansen’’s (1988, 1991) likelihood ratio test for no cointegration when the number of observations and the dimensionality of the vector autoregression diverge to infi…nity simultaneously and proportionally. We …find that the empirical distribution of the squared canonical correlations that the test is based on converges to the so-called Wachter distribution. This …finding provides a theoretical explanation for the observed tendency of the test to fi…nd “spurious cointegration” in the data. It also sheds light on the workings and limitations of the Bartlett correction approach to the over-rejection problem. We propose a simple graphical device, similar to the scree plot, as a quick check of the null hypothesis of no cointegration in high-dimensional VARs. Joint with Chen Wang (University of Cambridge).