Tests for cointegration - A Monte Carlo comparison

Several tests for cointegration have been suggested in the literature and applied researchers are faced with the problem which test to use. This paper compares the power and the size distortions of cointegration tests with the Monte Carlo method and finds a trade-off between power and size distortions. Stock and Watson's (1988) SW and Phillips and Ouliaris' (1990) (P) over cap(z)$ tests perform best in terms of power when the cointegration regressors are endogenous. With exogenous regressors, the (Z) over cap(alpha), test performs best. Johansen and Juselius' (1990) lambda(max) test and the ADF test reveal overall the least size distortions.