INFERENCE ON SEGMENTED COINTEGRATION

A cointegration relation is often interpreted as a long-run equilibrium relation whereas short-run deviations are allowed to a certain extent. In practice, however, real data often fail to confirm cointegration for a well understood economic relation. This paper proposes that in many cases failure of confirming cointegration is due to nonstationary deviations in a relatively small portion of the data period (“short-run”) whereas a cointegration relation prevails in the other periods. We call such a situation segmented cointegration. We study in this paper how to detect segmented cointegration and how to identify the period of short-run deviations.I thank Pentti Saikkonen and three anonymous referees for helpful comments. I am deeply indebted to Peter Phillips for encouragement, discussion, and helpful comments on this work. The research of this paper is supported by the Research Grants Council of Hong Kong (grant HKUST6178/98H) and FRAP B of SUNY-Albany (account 320-9709W).