A1067
Title: Online breakpoint-detection in cointegrating relationships
Authors: Leopold Soegner - Institute for Advanced Studies (Austria) [presenting]
Martin Wagner - University of Klagenfurt and Institute for Advanced Studies, Vienna (Austria)
Abstract: A closed-end consistent monitoring procedure is developed with the goal of detecting structural changes in cointegrating relationships. The vector error correction model is considered, and different specifications of the deterministic terms are allowed for. $\beta y_t$ is considered, where $\beta$ is a matrix containing the cointegrating vectors and $(y_t)$ is a process integrated of order one, and propose a monitoring test statistic to investigate the stability of these cointegrating relationships. The asymptotic distribution of the test statistic is obtained under the null hypothesis of no structural breaks. A calibration period is used for parameter estimation, after which online break-point detection is performed. The procedure stops at the first time point the test statistic exceeds the corresponding critical value. It is shown that the monitoring procedure is consistent. A simulation study is provided to investigate the finite sample properties of our monitoring procedure. The procedure is applied to investigate the triangular exchange rate parity.
