Local Power of Likelihood Ratio Tests for the Cointegrating Rank of a VAR Process

Pentti Saikkonen & Helmut Lütkepohl
Likelihood ratio (LR) tests for the cointegrating rank of a vector autoregressive (VAR) process have been developed under different assumptions regarding deterministic terms. For instance, nonzero mean terms and linear trends have been accounted for in some of the tests. In this paper we provide a general framework for deriving the local power properties of these tests. Thereby it is possible to assess the virtue of utilizing varying amounts of prior information by making assumptions...
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