New Improved Tests for Cointegration with Structural Breaks

Abstract

Abstract. This article proposes Lagrange multiplier‐based tests for the null hypothesis of no cointegration. The tests are general enough to allow for heteroskedastic and serially correlated errors, deterministic trends, and a structural break of unknown timing in both the intercept and slope. The limiting distributions of the test statistics are derived, and are found to be invariant not only with respect to the trend and structural break, but also with respect to the regressors. A small Monte Carlo study is also conducted to investigate the small‐sample properties of the tests. The results reveal that the tests have small size distortions and good power relative to other tests.