Cointegration analysis in the presence of flexible trends

Abstract

Intercept and deterministic trend functions are known to have a substantial e ect on cointegration analysis and notably on the asymptotic distributions of various test statistics In this paper we propose a unifying approach to the analysis of cointegrated vector autoregressions by allowing for a wide class of trend functions Next estimates of these trends are incorporated in the asymptotic distributions of the test statistics This approach allows incorporating elaborate drift functions in cointegration analysis while avoiding the issue of the signicance of the trend these functions give rise to Simulation techniques can yield the appropriate critical values