In this tutorial on Cointegration Test Including Multiple Breaks Using GAUSS, we will show using GUASS how to estimate cointegration tests with multiple breaks. Abdulnasser Hatemi-J has written an excellent paper titled: Tests for cointegration with two unknown regime shifts with an application to financial market integration which describes the methodology of Cointegration Test Including Multiple Breaks and we have used his written code available here. The abstract of the paper is quoted here:
It is widely agreed in empirical studies that allowing for potential structural change in economic processes is an important issue. In existing literature, tests for cointegration between time series data allow for one regime shift. This paper extends three residual-based test statistics for cointegration to the cases that take into account two possible regime shifts. The timing of each shift is unknown a priori and it is determined endogenously. The distributions of the tests are non-standard. We generate new critical values via simulation methods. The size and power properties of these test statistics are evaluated through Monte Carlo simulations, which show the tests have small size distortions and very good power properties. The test methods introduced in this paper are applied to determine whether the financial markets in the US and the UK are integrated.
Cointegration Test Including Multiple Breaks Using GAUSS can be replicated using the following video tutorial or simply follow the steps:
Create a data file as coint.txt which might include one dv and upto 2 DVs.
Create a new file again and copy the code from: https://ideas.repec.org/c/boc/bocode/g00006.html
Save the code using a name of your choice.
Now, change the arguments related to number of observations, number of variables and load the data file in GAUSS
Then create the relevant matrices and vectors by changing the default arguments to specific to the data.
Then run the code ensuring the files are in the same folder as in the directory.
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