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    Econometrics: Dr. Sayyid Salman Rizavi

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    Khurram Aziz
    GFCF and imports for Pakistan from 1983 to 2012 are cointegrated based on the following analysis: 1) GFCF and imports are both integrated of order one (non-stationary but stationary after first differencing). 2) An Engle-Granger cointegration test was performed including regressing GFCF on imports to generate the residuals, then regressing the first difference of the residuals on the lag of the residuals. 3) The t-value of the lagged residuals was greater than the critical value, indicating cointegration between GFCF and imports. Therefore, an error correction model could be used to model the relationship between the two variables.

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    Econometrics: Dr. Sayyid Salman Rizavi

    Uploaded by

    Khurram Aziz
    123 views23 pages
    GFCF and imports for Pakistan from 1983 to 2012 are cointegrated based on the following analysis: 1) GFCF and imports are both integrated of order one (non-stationary but stationary after first differencing). 2) An Engle-Granger cointegration test was performed including regressing GFCF on imports to generate the residuals, then regressing the first difference of the residuals on the lag of the residuals. 3) The t-value of the lagged residuals was greater than the critical value, indicating cointegration between GFCF and imports. Therefore, an error correction model could be used to model the relationship between the two variables.

    Original Description:

    Econometrics Lectures

    Original Title

    Econometric s Lecture 44

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    GFCF and imports for Pakistan from 1983 to 2012 are cointegrated based on the following analysis: 1) GFCF and imports are both integrated of order one (non-stationary but stationary after first differencing). 2) An Engle-Granger cointegration test was performed including regressing GFCF on imports to generate the residuals, then regressing the first difference of the residuals on the lag of the residuals. 3) The t-value of the lagged residuals was greater than the critical value, indicating cointegration between GFCF and imports. Therefore, an error correction model could be used to model the relationship between the two variables.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    123 views23 pages

    Econometrics: Dr. Sayyid Salman Rizavi

    Uploaded by

    Khurram Aziz
    GFCF and imports for Pakistan from 1983 to 2012 are cointegrated based on the following analysis: 1) GFCF and imports are both integrated of order one (non-stationary but stationary after first differencing). 2) An Engle-Granger cointegration test was performed including regressing GFCF on imports to generate the residuals, then regressing the first difference of the residuals on the lag of the residuals. 3) The t-value of the lagged residuals was greater than the critical value, indicating cointegration between GFCF and imports. Therefore, an error correction model could be used to model the relationship between the two variables.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 23

    In The Name of Allah, The Most Beneficent, The Most Merciful

    Econometrics
    Lecture 44

    Dr. Sayyid Salman Rizavi


    Stationary & Non-Stationary data
    Unit Root Test
    Cointegration & Error Correction Model
    Stationary and Non-Stationary Time Series
    What to do in case of non-stationarity?
    Differencing: throws out long term properties
    of the series and is good for short term
    modeling .

    Cointegration: Granger introduces this.


    Cointegration

    Integrated Series

    Equilibrium Relationship exists

    Deviation from equilibrium is adjusted over time


    Cointegration & Error Correction Model
    Using Stata

    Engle-Granger Cointegration Analysis: STEPS


    Test individual variables for unit root
    Estimate the static regression
    Test for unit roots in the error of the static
    regression; if residuals are stationary, series
    are cointegrated.
    Finally we can use Error Correction Model
    Cointegration & Error Correction Model
    Using Stata
    Granger: two or more integrated time series that
    are cointegrated have an error correction
    representation.

    Granger Representation Theorem

    Short run impact

    Speed of coming back to equilibrium


    Cointegration & Error Correction Model
    Using Stata
    The EC model is:

    = + 1 1 +

    NOTE: ECM is normally used on non-stationary


    data but can be used for stationary data.
    Cointegration & Error Correction Model
    Using Stata
    Stationary Data means that data has a finite
    mean and variance that do not depend on
    time.

    Data reverts to mean in the long run. It


    crossed the mean quite often.

    Usually time series data is not stationary but


    is integrated.
    Cointegration & Error Correction Model
    Using Stata
    Integrated time series data:
    Does not revert to the mean
    Usually moves in a random walk
    Previous changes are reflected in the current
    value
    May have infinite variance and no appropriate
    mean
    Shocks are permanently incorporated

    If a non-stationary series is difference times


    in order to become stationary, it is said to be
    integrated of order .
    Cointegration & Error Correction Model
    Using Stata
    Two series are cointegrated if
    They are integrated of the same order

    There is a linear combination of the two


    series that is stationary i.e. integrated of
    order zero I(0)

    Cointegrated data do not drift very far from


    each other.

    Deviation from equilibrium will be corrected


    over time
    Cointegration & Error Correction Model
    Using Stata
    Critical values of cointegration equation
    Cointegration & Error Correction Model
    Example
    Consider the file ECM.dta provided to you.

    It contains Pakistani data (GDP, GFCF, imports


    etc.) from WDI

    Year 1983 to 2012

    Suppose we focus on GFCF and IMPORTS


    Cointegration & Error Correction Model
    Example
    Are GFCF and imports cointegrated?

    First we check
    if individual
    variables are
    integrated?

    Here, gfcf is
    integrated at
    first difference
    or level one.
    Cointegration & Error Correction Model
    Example
    Individual variables must be integrated at the
    same level
    First we check
    if individual
    variables are
    integrated?

    Here, the
    variable
    imports is
    integrated at
    first difference
    or level one.
    Cointegration & Error Correction Model
    Example
    Are GFCF and imports cointegrated?
    We use Engle Granger Test. It has three steps.
    Run a basic regression (long run)
    Predict the errors
    Run the regression of First difference of
    residuals on lag of residuals and on lag of first
    difference of residuals
    If the coefficient of lag of residuals is
    significant, the series are cointegrated.
    IMPORTANT: the t-values reported in simple
    regression are not appropriate so we use the
    EG critical values.
    Cointegration & Error Correction Model
    Example
    Are GFCF and imports cointegrated?
    Step I: run a basic regression
    Cointegration & Error Correction Model
    Example
    Are GFCF and imports cointegrated?
    Step II & III
    First we check
    if individual
    variables are
    integrated?

    Here, the
    variable
    imports is
    integrated at
    first difference
    or level one.
    Cointegration & Error Correction Model
    Example
    Are GFCF and imports cointegrated?
    Interpreting results
    Coefficient of first lag of residuals is -0.5926

    t-value is -3.42

    The critical value at 5% is -3.37.

    hypothesis of no Cointegration is rejected

    If > , we reject the null hypothesis of no co-


    integration
    Cointegration & Error Correction Model
    Example
    Engle and Granger suggested a model for
    cointegrated series

    The EC model is:


    = + 1 1 +
    Cointegration & Error Correction Model
    Example
    Engle and Granger suggested a model for
    cointegrated series
    using the file ECM.dta,


    ,

    Now using the residuals etc. run the following


    command
    . . .
    Cointegration & Error Correction Model
    Example
    Cointegration & Error Correction Model
    Example
    Check if the error generated here is stationary

    Additional or alternative lags and


    deterministic terms may be added.
    Thank you Very Much

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