Beruflich Dokumente
Kultur Dokumente
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Cointegration
Basic Ideas and Key results
Egon Zakrajsek
Division of Monetary Affairs
Federal Reserve Board
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Motivation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Some Examples
The permanent income hypothesis (PIH) implies cointegration
between consumption and income.
Money demand models imply cointegration between money,
nominal income, prices, and interest rates.
Growth theory models imply cointegration between income,
consumption, and investment.
Purchasing power parity (PPP) implies cointegration between the
nominal exchange rate and foreign and domestic prices.
The Fisher equation implies cointegration between nominal
interest rates and inflation.
The expectations hypothesis of the term structure implies
cointegration between nominal interest rates at different
maturities.
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Cointegration
Consider two time series y1,t and y2,t , known to be I(1):
Let y1 and y2 denote T -vectors:
y1,1
y1,2
y1 = .
.
.
(T 1)
y1,T
y2,1
y2,2
y2 = .
.
.
(T 1)
y2,T
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Cointegration
Y = [y1 y2 ]
X = nonstochastic matrix (i.e., constant, trends)
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Cointegration
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Common Trends
Consider the following two trend-stationary I(1) series:
y1,t = 1 + 1 t + u1,t
y2,t = 2 + 2 t + u2,t
{u1,t }
t= and {u2,t }t= are white noise processes.
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Common Trends
Consider the following two independent random walk processes:
y1,t = w1,t
y2,t = w2,t
wi,t = wi,t1 + i,t
i,t , i = 1, 2, are two independent white noise processes.
Any linear combination of y1,t and y2,t must involve random walks
w1,t and w2,t :
y1,t and y2,t cannot be cointegrated unless w1,t = w2,t
Once again, y1,t and y2,t must have a common trend.
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Common Trends
In a bivariate case, the end result is that if y1,t and y2,t are
cointegrated, then they must share exactly one common stochastic or
deterministic trend.
This observation, readily generalizes to multivariate cointegration:
A set of m series that are cointegrated can be written as a
covariance-stationary component plus a linear combination of a
smaller set of common trends.
The effect of cointegration is to purge these common trends from
the resultant series.
Obvious econometric questions:
How to estimate the cointegrating vector ?
How to test whether two or more variables are in fact
cointegrated?
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
p
X
Yj
j +
j=p
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
ADF test:
t = ( 1)
t +
p
X
j
tj + et
j=1
t = y1t X 0 Y2t0
= OLS or DOLS estimate of the cointegrating vector
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation
Error-Correction Model
Consider:
Yt = [y1t y2t ]0 = bivariate I(1) process
Yt is cointegrated with = [1 2 ]0
Error-Correction Model (ECM) (Engle & Granger (1987)):
y1t = 1 + 1 [y1t1 y2t1 ]
X
X
+
1j y1tj +
1j y2tj + e1t
j
Introduction
Common Trends
Estimating Cointegrating Vectors
Testing For Cointegration
Error-Correction Representation