Term 2 lecture notes Co-integration Flashcards
How is a stationary series integrated?
What does it mean if the change in Zt = I(0)
it means the series is I(o)
and integrated of order 1 means it needs to be differenced 0 times for it to be stationary.
It means the original series was I(1)
What is the definition of co-integration?
Why does this work?
Co-integrates if yt and xt sepeartely are cointegrated of order 1
Then the linear combination of them is integrated of order 0
-As long as they share the same stochastic trend.
What is a method for testing co-integration?
What are the notes?
Engle and granger
Step 1 regress long run equation then save residuals
Then save residuals and use ADF test
if gamma = 0 non-stationary —– no cointegration as the linear sum is not I(0)
If gamma is less than 0 stationary and therefore it is stationary.
Find correct p as normal
-You must justify if you use a trend or not.
How do you use the mckinnon tables differently when doing cointegration
As you are working out the difference in stationarity between residuals you therefore use the n = the number of I(1) eqautions.
What does it mean if something is stationary?
What does the evidence in using static and dynamic models to test for cointegration
in finite samples it is better to solve for a dynamic model
What happens to OLS estimate when you have cointegration compared to stationary series?
The OLS estimates are super consistent if they are co-integrated.
Stationary approaches real parameter at rate root T
Whilst cointegrated reaches at rate T
Why is super-consistency in cointegration useuful?
If there is any mispspecifciation as t goes to inifinity it makes no difference.
What is the error correction model?
What does it mean?
SR changes are a measure of disequilibrium last period
What is the issue with unrelated non-stationary series and why is this?
77% of the time you will find a correlation when there is no relation.
This is because of the stochastic trend.
Graphically what is the difference between sprurious and cointegrated
Spurious the residuals have random
Cointegrated they are stationary looking.
