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By taking into account the thick-tail property of the errors, cointegration analysis in vector error-correction models with infinite-variance stable errors is a natural generalization of cointegration analysis in error-correction models with normally distributed errors. We study the Johansen test for cointegrated systems under symmetric stable innovations with discrete spectral measures. The results show that the distributions of the Johansen test statistics under these innovations involve nuisance parameters. To overcome the problem of nuisance parameters, we implement a nonparametric subsampling procedure. We document some subsampling simulation results and demonstrate in an empirical example how the test can be used in practice.
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Keywords: cointegration; infinite variance; stable distribution; thick tails

Document Type: Research Article

Publication date: March 1, 2010

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