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Engle granger 2 step procedure
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First test the variables for their order of integration
Test the level and first and maybe second difference
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Changing mean Corelogram dies away slowly Non stationary peak at zero
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Start pc-give and go to descriptive statistics for the DF tests
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Pick largest AIC value Borderline but non-stationary
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So pictures say non stationary and so do the tests.
Repeat for differences and for the other variables
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Then start to asses cointegration
Start econometric modelling Estimate a simple static equation (no lags)
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CRDW too low
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Now test the residual for sationarity
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All 3 look non stationary
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Different critical values test does not reject non-stationarity
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So add variables until we get cointegration
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Crdw much higher
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Now save and test this residual
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All suggest stationary residual
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Wrong critical value but test is now about right
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So now build error correction model
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PASSES ALL TESTS
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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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