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Engle granger 2 step procedure

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Presentation on theme: "Engle granger 2 step procedure"— Presentation transcript:

1 Engle granger 2 step procedure

2 First test the variables for their order of integration
Test the level and first and maybe second difference

3 Changing mean Corelogram dies away slowly Non stationary peak at zero

4 Start pc-give and go to descriptive statistics for the DF tests

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8 Pick largest AIC value Borderline but non-stationary

9 So pictures say non stationary and so do the tests.
Repeat for differences and for the other variables

10 Then start to asses cointegration
Start econometric modelling Estimate a simple static equation (no lags)

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14 CRDW too low

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18 Now test the residual for sationarity

19 All 3 look non stationary

20 Different critical values test does not reject non-stationarity

21 So add variables until we get cointegration

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23 Crdw much higher

24 Now save and test this residual

25 All suggest stationary residual

26 Wrong critical value but test is now about right

27 So now build error correction model

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30 PASSES ALL TESTS

31 Now just delete the insignificant variables making sure that you do not fail any of the tests until we get a parsimonious model


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