COINTEGRATION-lab

# COINTEGRATION-lab - COINTEGRATION in EVIEWS 1 Spurious...

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COINTEGRATION in EVIEWS 1. Spurious regression We can perform the following Monte Carlo analysis and generate a large number of y t and x t series containing unit roots following the formulae: y t = y t-1 + e t x t = x t-1 + e t We can generate the random errors artificially. To understand spurious regression problem, type in the following commands after opening the r-stock1.wf1 file. smpl @first @first+1 genr y =0 genr x=0 smpl @first+1 @last genr y = y(-1)+nrnd genr x = x(-1)+nrnd scat(r) y x smpl @first @last ls y c x 1

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From the OLS estimation do you find evidence of spurious regression? Check if R- squared > D.W. or R-squared is close to 1. Engle-Granger cointegration: To test for cointegration between X and Y in the above randomly generated sample, you need to save the residuals in the first step. Then, in the second step, you need to run ADF regression in the residuals to check if there is a unit root. The commands are: ls y c x genr res_000 = resid adf res_000
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