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Ray Y. Chou is an assistant professor of economics at the Ivan Allen College of the Georgia Institute of Technology, Victor K. Ng is an economist in the Capital Markets and Financial Studies Division of the Research Department of the International Monetary Fund, and Lynn K. Pi is an associate professor of finance at the California State University at Hayward. This paper was presented at the American Statistical Association Meeting in Toronto in August 1994. The paper will be published in the conference proceeding for the meeting. Most of the work in this paper was done prior to Victor K. Ng joining the International Monetary Fund. The views expressed in this paper do not necessarily represent those of the International Monetary Fund.
A 20 percent significance level may seem too high to use for the test. However, since the power of the tests are likely to be low for cointegrating vectors with roots close to but outside the unit circle, it is not unreasonable to reject at a higher p-value than the usual 5 percent. For example, a 20 percent significance level is also used in Johansen and Juselius (1990).