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A Recursive Monte Carlo Study of Structural-Break Sensitivity of Adjustment Coefficients in Cointegrated VAR Systems

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Abstract

This paper studies the sensitivity of adjustment coefficients to various structural breaks in a cointegrated vector autoregressive system. A Monte Carlo simulation study is conducted in a recursive manner to examine fluctuations of finite-sample estimates of the coefficients. The study reveals the wide-ranging influences of breaks on the estimates, which can give rise to inference for spurious time-varying adjustment coefficients, although the underlying true coefficients are stable and time-invariant. It is thus advisable to be cautious about seemingly time-varying adjustment coefficients when analyzing time series data subject to structural breaks.

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Acknowledgements

I am grateful to two anonymous referees for their helpful comments and suggestions. I would also like to acknowledge financial support from JSPS KAKENHI (Grant Number: 18K01600).

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  1. Faculty of Economics, Fukuoka University, 8-19-1 Nanakuma, Jonan-ku, Fukuoka, 814-0180, Japan

    Takamitsu Kurita

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  1. Takamitsu Kurita
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Correspondence to Takamitsu Kurita.

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Kurita, T. A Recursive Monte Carlo Study of Structural-Break Sensitivity of Adjustment Coefficients in Cointegrated VAR Systems. J. Quant. Econ. 17, 251–270 (2019). https://doi.org/10.1007/s40953-019-00162-2

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