Anderson 4 cointegration say for two i1 processes yt

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

Ask a homework question - tutors are online