Identification example

This continues on from the Johansen demonstration Under standard finance theory the weekly libor rate should cointegrate with the monthly and the weekly should cointegrate with the 3 month Implies 2 bivariate vectors

Weekly = monthly Weekly = 3month So 6 restrictions (-1,1,0) and -1,0,1) We need 4 for identification so 2 over identifying restrictions to test.

This follows on from the last demo We have already tested cointegration Estimated the model subject to 2 cointegrating vectors Now we impose the restrictions

First we will apply just identifying restrictions

Now we will apply and test the 2 over identifying restrictions

Restricted cointegrating vectors

TEST of restriction