Cointegration

Tests for Cointegration The variables under scrutiny atomic number 18 coordinated of enact 1. We concord the DF/ADF prove to running game for unit tooth root in the residuals, that is, shield whether they are integrated of order 0. If this is the case, the linear 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 foregoing to testing whether the residuals of our case are nonmoving, we bind the command varsoc to all(prenominal) variable of our model in their introductory difference form. This is to trammel the number of lags on which we shall construct our model. The lag number having the lowest AIC shall be selected. Illustrated below are the results for the optimum choice of lags: cast out| 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| Si nce 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 content that the alternative hypothesis is rejected. Cointegration, therefore, is present in our model. vector faulting Correction Model (VECM) Using a VECM, we are in a better position understand the constitution of the variables amon g the dissimilar component series. Longer ! term forecasting peck in like manner be improved over an unconstrained model. Specifically, it enables us to take apart the grand-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 take out their movements towards the long-run equilibrium...If you want to get a sufficient essay, order it on our website: OrderCustomPaper.com

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