Spurious rejection by cointegration tests incorporating structural change in the cointegrating relationship

In recent research, Leybourne and Newbold have shown commonly employed tests of cointegration to exhibit spurious rejection when applied to independent unit root processes subject to breaks in either level or trend. In the present paper, this research is extended to consider the finite-sample properties of cointegration tests which explicitly incorporate structural change. It is shown that when applied to independent unit root processes subject to regime shifts, cointegration tests permitting structural change in the cointegrating relationship can spuriously reject the null of no cointegration more frequently than the standard tests considered by Leybourne and Newbold.