Cointegration

Tests for Cointegration The variables under scrutiny atomic number 18 coordinated of severalise 1. We concord the DF/ADF prove to strain for unit solvent in the residuals, that is, mental testing whether they are integrated of order 0. If this is the case, the unidimensional interpretation (ut) of our I(1) variables is integrated of order zero. In such a case, our variables will deemed to be cointegrated. Choosing the tuck away length anterior to testing whether the residuals of our case are nonmoving, we bind the command varsoc to all variable of our model in their introductory difference form. This is to feel the number of lags on which we shall construct our model. The lag number having the last-place AIC shall be selected. Illustrated below are the results for the optimum choice of lags: put behind bars| Degree of freedom| p encourage| AIC| 0| -| -| 18.131| 1| 1| 0.001| 17.7769| 2| 1| 0.114| 17.7589*| 3| 1| 0.831| 17.8287| 4| 1| 0.052| 17.7654| Since at lag 2 the value of AIC is at its lowest point, the number of lags in our model will be 2. ADF/DF Test The hypotheses used for this test are as follows: Ho: variable is not stationary. H1: variable is stationary. The residual is stationary because the modulus of the test statistics is less than the critical values, i.e.

the test statistics lie in the rejection region, which mover that the alternative hypothesis is rejected. Cointegration, therefore, is present in our model. vector delusion Correction Model (VECM) Using a VECM, we are in a better position understand the constitution of the v ariables among the antithetic component se! ries. Longer term forecasting peck in addition be improved over an unconstrained model. Specifically, it enables us to go through the foresightful-term relationship between the time series and test for the existence and direction of causality. Our variables are cointegrated. This implies that in the petty run, deviations from this long run equilibrium will be reverse to get their movements towards the long-run equilibrium...If you want to get a sufficient essay, order it on our website: BestEssayCheap.com

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