Using the conventional VAR identification approach, Cochrane (Quarterly Journal of Economics 107: 241-65, 1994) finds that substantial amounts of variation in GDP growth and stock returns are due to transitory shocks. Following the common trend decomposition of King etal. (American Economic...

Using the conventional VAR identification approach, Cochrane (1994) finds that substantial amounts of variation in GDP growth and stock returns are due to transitory shocks. Following the common trend decomposition of King, et al. (1991), we show that Cochrane's results depend on the assumption...

This paper shows that when series are fractionally integrated, but unit root tests wrongly indicate that they are I(1), Johansen likelihood ratio (LR) tests tend to find too much spurious cointegration, while the Engle-Granger test presents a more robust performance. This result holds...