Sequential monitoring for cointegrating regressions

Abstract

We develop monitoring procedures for cointegrating regressions, testing the null of no breaks against the alternatives that there is either a change in the slope, or a change to non-cointegration. After observing the regression for a calibration sample m, we study a CUSUM-type statistic to detect the presence of change during a monitoring horizon m+1,...,T. Our procedures use a class of boundary functions which depend on a parameter whose value affects the delay in detecting the possible break. Technically, these procedures are based on almost sure limiting theorems whose derivation is not straightforward. We therefore define a monitoring function which - at every point in time - diverges to infinity under the null, and drifts to zero under alternatives. We cast this sequence in a randomised procedure to construct an i.i.d. sequence, which we then employ to define the detector function. Our monitoring procedure rejects the null of no break (when correct) with a small probability, whilst it rejects with probability one over the monitoring horizon in the presence of breaks.