A Bootstrap Co-Integration Rank Test for Panels of Co-Integrated VARs.

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Abstract:

This paper proposes a sequential procedure to determine the co-integration rank of panels of co-integrated VAR models. The rank is defined as the number of co-integration vectors within an individual system and between that system and the rest of the panel. The method proposed by Pesaran (2006) is used to control for cross section dependence and reduce the dimension of the parameter space. A bootstrap procedure derived from the bootstrap rank test of Cavaliere, Rahbek, and Taylor (2012) is used to compute the empirical distribution of the trace test statistics and construct a panel trace test statistic based on pooling of the individual p-values. The small sample properties of these tests are documented by means of Monte Carlo. An empirical application illustrates the usefulness of this tests.