Home > Documents > EVIEWS tutorial: Cointegration and error correction

EVIEWS tutorial: Cointegration and error correction

Date post: 09-Jan-2017
Category:
View: 238 times
16
1 1 © Roy Batchelor 2000 EVIEWS Tutorial 1 EVIEWS tutorial: Cointegration and error correction Professor Roy Batchelor City University Business School, London & ESCP, Paris © Roy Batchelor 2000 EVIEWS Tutorial 2 EVIEWS r On the City University system, EVIEWS 3.1 is in Start/ Programs/ Departmental Software/CUBS r Analysing stationarity in a single variable using VIEW r Analysing cointegration among a group of variables r Estimating an ECM model r Estimating a VAR-ECM model
Transcript

11

© Roy Batchelor 2000EVIEWS Tutorial 1

EVIEWS tutorial:Cointegration and error correction

Professor Roy BatchelorCity University Business School, London& ESCP, Paris

© Roy Batchelor 2000EVIEWS Tutorial 2

EVIEWS

r On the City University system, EVIEWS 3.1 is inStart/ Programs/ Departmental Software/CUBS

r Analysing stationarity in a single variable using VIEW

r Analysing cointegration among a group of variables

r Estimating an ECM model

r Estimating a VAR-ECM model

22

© Roy Batchelor 2000EVIEWS Tutorial 3

The FT500M workfile

© Roy Batchelor 2000EVIEWS Tutorial 4

Data transformation

r Generate a series for the natural log of the FT500 index (lft500)

r Test for stationarity in

– the level of this series– the first difference of this series (dlft500)

r Results show that lft500 is an I(1) variable

33

© Roy Batchelor 2000EVIEWS Tutorial 5

Generate ln(FT500)

© Roy Batchelor 2000EVIEWS Tutorial 6

44

© Roy Batchelor 2000EVIEWS Tutorial 7

The hypothesis thatlft500 has a unit rootcannot be rejected

The hypothesis thatlft500 has a unit rootcannot be rejected

© Roy Batchelor 2000EVIEWS Tutorial 8

The hypothesis thatthe first difference oflft500 has a unit rootcan be rejected.

So lft500 is I(1)

The hypothesis thatthe first difference oflft500 has a unit rootcan be rejected.

So lft500 is I(1)

55

© Roy Batchelor 2000EVIEWS Tutorial 9

Cointegration: two variables

r The variables lft500 (log of stock index) and ldiv (log ofdividends per share) are both I(1)

r We can test whether they are cointegrated– that is, whether a linear function of these is I(0)– An example of a linear function is

lft500t = a0 + a1ldivt + ut

when ut = [lft500t - a0 - a1ldiv] might be I(0)

r The expression in brackets [] is called the cointegrating vector,which has normalised coefficients [ 1, -a0 , -a1 ]

© Roy Batchelor 2000EVIEWS Tutorial 10

Form new group ...

66

© Roy Batchelor 2000EVIEWS Tutorial 11

Common trends?

© Roy Batchelor 2000EVIEWS Tutorial 12

Engle-Granger: first stage regression

77

© Roy Batchelor 2000EVIEWS Tutorial 13

Save first-stage residuals (ut = RES)

© Roy Batchelor 2000EVIEWS Tutorial 14

Engle-Granger:stage two (ECM) regression

“corrected” eachmonth

“corrected” eachmonth

88

© Roy Batchelor 2000EVIEWS Tutorial 15

General model: stage one (I(1) variables)

© Roy Batchelor 2000EVIEWS Tutorial 16

General model: stage two

99

© Roy Batchelor 2000EVIEWS Tutorial 17

Specific model:stage two

© Roy Batchelor 2000EVIEWS Tutorial 18

1-month ahead forecasts of lft500 from firststage regression

1010

© Roy Batchelor 2000EVIEWS Tutorial 19

1-month ahead forecasts of dlft500 fromthe second stage ECM

© Roy Batchelor 2000EVIEWS Tutorial 20

1-month ahead changes in lft500:actual v. forecast

1111

© Roy Batchelor 2000EVIEWS Tutorial 21

Johansen method: make group ofassociated I(1) variables (lft500, ldiv)

© Roy Batchelor 2000EVIEWS Tutorial 22

Set up Johansen procedure

1212

© Roy Batchelor 2000EVIEWS Tutorial 23

Johansen test for cointegrating vector(s)

© Roy Batchelor 2000EVIEWS Tutorial 24

Cointegrating vector (cf. First stageregression)

1313

© Roy Batchelor 2000EVIEWS Tutorial 25

Set up VAR-ECM

© Roy Batchelor 2000EVIEWS Tutorial 26

Cointegrating vector of both endogenousI(1) variables

1414

© Roy Batchelor 2000EVIEWS Tutorial 27

VAR-ECM-X models for both endogenousvariables

“corrected” each monthby changes in stock

index lft500

“corrected” each monthby changes in stock

index lft500

“corrected” each monthby changes in dividends

ldiv

“corrected” each monthby changes in dividends

ldiv

Exogenous I(0)variables

affecting stockindex anddividends

Exogenous I(0)variables

affecting stockindex anddividends

© Roy Batchelor 2000EVIEWS Tutorial 28

Forecasting: make VAR-ECM model

1515

© Roy Batchelor 2000EVIEWS Tutorial 29

© Roy Batchelor 2000EVIEWS Tutorial 30

Stock index and dividend forecasts, 1996

1616

© Roy Batchelor 2000EVIEWS Tutorial 31

Updated model (1975-98)

© Roy Batchelor 2000EVIEWS Tutorial 32

Forecasts for 1999-2000: a Crash coming?

Recommended