ECM-Cointegration test with GARCH(1,1) Errors

By Panagiotis Mantalos .

Abstract: By using Monte Carlo experiment, we study the robustness of the ECM-Cointegration tests when the first difference of the series follow a GARCH(1,1) process and the behaviour of the ARCH-tests of ECM residuals for variation of GARCH parameters. We found that if two series are individually I(1) and follow a GARCH (1,1), then ECM-Cointegration test tend to overreject for small samples but the problem is not very serious for large sample except when the errorsīs GARCH process is nearly integrated and the volatility parameter is not small. Finally the Wild Bootstrap is robust on GARCH(1,1) without lost of power.

Key Words: ARCH, Bootstrap, Cointegration, GARCH, Wild Bootstrap

Panagiotis Mantalos,

Editor: Renato Di Lorenzo ,

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