The power of tests for non-linearity: the case of Granger-Lee asymmetry

Abstract

We examine the power of the Granger-Lee [Granger, C.W.J., Lee, T.H., 1989. Investigation of production, sales and inventory relationships using multicointegration and non-symmetric error correction models. Journal of Applied Econometrics 4, S145–S159.] test for asymmetric adjustment in an error correction model. Monte Carlo simulations indicate that such tests typically have low power in rejecting the null of symmetric adjustment. The power of the test increases with the sample size and with the ratio of the variance of the independent variable to the dependent variable.