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Alexander Ludwig
''What results can we expect from rolling trace tests? A discussion based on the issue of stock market integration''
( 2014, Vol. 34 No.1 )
This paper discusses pitfalls in the application of the rolling trace test. This procedure is based on the iterative calculation of Johansen's (1988) trace test for the rank of a cointegration system in windows of equal length that roll over the sample. Pitfalls lie in the selection of the window length and of the lag order for short-run coefficients as well as in the presence of stationary variables in some sub-periods. We give practical recommendations to solve these issues and demonstrate their implications when assessing the integration of four major European stock markets.
Keywords: rolling cointegration, rolling trace test, rolling unit root test, lag selection, window selection, stock market integration
JEL: C2 - Single Equation Models; Single Variables: General
C5 - Econometric Modeling: General
Manuscript Received : May 15 2013 Manuscript Accepted : Jan 06 2014

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