Professional Documents
Culture Documents
C0integration test (first we check stationary of data if all variable are stationary at first difference, then
we will check cointegration ,if we find cointegration then we can go for ECM ,following chart also
describing this procedure
Remember, the cointegration test is only valid if you have non-stationary series!
The purpose of the cointegration test is to determine whether several non-stationary time
series are cointegrated or not. The presence of a Cointegrating relation forms the basis of the
ECM(Cointegrating tells about the long run relationship, existence)
To perform Johansen cointegration test, first open the series: or quick-group statistics
Suppose all the variables are stationary at first difference and now we are going for
cointegration
Simple enter and in a dialog box simple write name of variable like lgdp lexport and enter.
When
you
will
inter
window
will
be
open
like
The first two tables report results for testing the number of Cointegrating relations. Two types of test
statistics are reported: trace statistics and the maximum eigenvalue statistics. For each table, the first
column is the number of Cointegrating relations under the null hypothesis, the second column is the
ordered eigenvalues of the matrix , the third column is the test statistic, and the last two columns are
the 5% critical values
ECM error correction model (in above pages we saw cointegration among variable so now
we will go for Ecm
Why we use error correction model?
There are some problems in first difference these are following thats why we apply ECM.
In first difference even we find that spurious relation(meaningless relation
,mathematically relation exist but logically does not exist like relationship between
GDP and Corruption there must be negative relation but due to trend here positive
relation exist) does not exist but we eliminate constant
Out correlation occur in error term(autocorrelation leads insignificant effects)
How to write equation of ECM simple first dependent variable then independent like
d(lgdp) c d(lexport) lgdp(-1) lexport(-1) and enter. Here GDP is our dependent variable and
export is independent all are in logged form and space in c and variables .(pre-condition I have
already told in crux part means all variables must be stationary at first difference)
d indicate short run relationship between variable like in this table export and dgp having no
significant relationship in short run value.91 and in long run .94 probability value is value that is
more than 5% which is insignificant so no relationship in long run .the variables which have
values(-1) indicate that how much quickly in extraordinary situations dependent variable convert
toward own actual level normally values comes equal to one or less than one if values increase
more than one it means dependent variable will not come again in actual level.