Testing for structural breaks in cointegrated relationships

The purpose of this paper is to investigate the tests of Hansen (1992) to detect structural breaks in cointegrated relations using Monte Carlo methods. The evaluation takes place within the linear quadratic model. We study models that generate cointegrated relations with single and multiple regressors. The evidence with multiple regressors suggests that the tests have proper size but the power is low when the cost of adjustment is high. In addition to the tests of Hansen, we consider the sensitivity of the augmented Dickey-Fuller (ADF) test for cointegration in the presence of a structural break. Given a break, our Monte Carlo experiments show that the rejection frequency of the ADF test decreases substantially. Thus the ADF test correctly indicates that the constant parameter cointegrating relationship is not appropriate.