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Unformatted text preview: ession problem
Economics 20 - Prof. Anderson 4 Cointegration
Say for two I(1) processes, yt and xt, there is a β such that yt – β xt is an I(0) process If so, we say that y and x are cointegrated, and call β the cointegration parameter If we know β , testing for cointegration is straightforward if we define st = yt – β xt Do Dickey-Fuller test and if we reject a unit root, then they are cointegrated
Economics 20 - Prof. Anderson 5 Cointegration (continued)
If β is unknown, then we first have to estimate β , which adds a complication After estimating β we run a regression of ∆ ût on ût-1 and compare t-statistic on ût-1 with the special critical values If there are trends, need to add it to the initial regression that estimates β and use...
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- Spring '08