Quantitative/ Analysis
ARDL bounds testing
Test a long-run relation with mixed integration orders
ARDL models combine lags of an outcome with current and lagged regressors. Bounds testing assesses whether lagged level terms form a long-run relation when regressors may be I(0), I(1), or a mixture. Critical bounds depend on deterministic specification; an intermediate statistic is inconclusive. Standard bounds procedures exclude I(2) variables and do not remove endogeneity concerns.
WHEN IT FITS
Use for a theory-led single-equation long-run relationship when integration orders are mixed but no variable is I(2). The time series must support plausible lag choices and a stable adjustment process.
Strengths
- Allows a mixture of I(0) and I(1) regressors
- Provides short-run and long-run parameterisations in one framework
Limitations
- An intermediate bounds result can be inconclusive
- Small samples, breaks and endogenous regressors can undermine interpretation
Know the boundary
ARDL is not a licence to skip integration checks or claim causality from a long-run coefficient.
USED ACROSS
Banking & financeBusiness & MBA