Cointegration testing under structural change: reducing size distortions and improving power of residual based tests

This paper investigates howstandard residual based tests for cointegration— under structural change in the long run relationship—canbemodified in order to reduce size distortions and improve power, by following the same ideas used in the unit root context. This is a natural strategy given that these tests are unit root statistics applied to estimated residuals from a cointegrating regression. In order to assess the finite sample performance of the alternative tests, a Monte Carlo experiment will be implemented to analyze size and power. Critical values for the tests constructed with GLS detrended data, proposed by Elliot et al. (Econometrica 64:813–836, 1996), are obtained by simulation.