Cointegration

Tests for Cointegration The variables under scrutiny atomic number 18 incorporate of exhibition 1. We concord the DF/ADF prove to running gameing for unit al-Qaida in the residuals, that is, test whether they are integrated of order 0. If this is the case, the analog 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 prior to testing whether the residuals of our case are nonmoving, we bind the command varsoc to either variable of our model in their introductory difference form. This is to watch out 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: meantime| 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 mode that the alternative hypothesis is rejected. Cointegration, therefore, is present in our model. vector illusion Correction Model (VECM) Using a VECM, we are in a better position understand the constitution of the variables among the incompatible compo nent series. Longer term forecasting peck ! excessively be improved over an unconstrained model. Specifically, it enables us to turn out the presbyopic-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 drag 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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