Chapter 5: Bivariate Cointegration Analysis

Size: px
Start display at page:

Download "Chapter 5: Bivariate Cointegration Analysis"

Transcription

1 Chapter 5: Bivariate Cointegration Analysis 1

2 Contents: Lehrstuhl für Department Empirische of Wirtschaftsforschung Empirical Research and und Econometrics Ökonometrie V. Bivariate Cointegration Analysis... 3 V.3.1 Definition of Cointegration... 3 V.3.2 Engle-Granger... 7 V.3.3 Error Correction Model

3 V. Bivariate Cointegration Analysis V.3.1 Definition of Cointegration Generally, cointegration is defined as follows: Given the M I(n) variables Y t = [Y 1t, Y 2t,, Y Mt ] The variables are cointegrated if r (with r < M) linear combinations are integrated of order k < n. The number of linear combinations has to be strict smaller than the number of variables. For r = M the linear combinations are simply a redefining of the initial variables, which from there should be already I(k). In many cases of economic applications k = 0, n = 1 and r = 1. Thus, one stationary I(0) linear combination of M I(1) variables exists. 3

4 Under negligence of a constant term we can write this linear combination as: Z t = Y 1t - γ 2 Y 2t - γ 3 Y 3t - - γ M Y Mt = γ Y t with γ [1, -γ 2,, -γ M ] In doing so, the coefficients γ can be a priori partially or completely known. 4

5 For example: If Y consists of the two variables long-term and short-term interest rate, then γ = [1,-1] defines the interest spread, because Z t = long-term interest(t) - short-term interest(t) = interest spread If Y consist of the three variables log exchange rate, log domestic and log foreign price level, then γ = [1,1,-1] defines the log of real exchange rate, because Z t = log(fx t ) + log(domestic P t ) (foreign P t ) = log(real FX t ) If we consider the real money supply, the real income and the interest rate, then the vector γ = [1,-γ 2,-γ 3 ] defines the error term of the demand for money function, because Z t = (real money supply t ) - γ 2 (real income t ) -γ 3 (interest rate t ) (real money supply t ) = γ 2 (real income t ) -γ 3 (interest rate t ) + Z t 5

6 Please note that: Two variables are considered as cointegrated if 1. both variables are non-stationary in their levels, 2. both variables show the same integration level, and 3. a linear combination of these two non-stationary variables possesses a lower integration level (I(d-b)). 6

7 V.3.2 Engle-Granger Approach If the coefficients of the cointegration relationship are known, the test of cointegration is reduced to a unit root test for the known linear combination Z, e.g. the interest spread or the log of real exchange rate. In this context, if we can reject the null hypothesis of non-stationarity for such a linear combination of I(1) time series, the data indicates cointegration. If the cointegration vector γ is unknown, then an estimation of the cointegration relationship must be added to this approach. As Engle and Granger had shown this can be done by OLS estimation of the linear regression equation: Y t = γ 1 + γ 2 Y 2t + + γ M Y Mt + Z t 7

8 This OLS estimation has unusual properties: 1) The normalisation (the choice of the dependent variable) does not play asymptotically a role. Asymptotically there arise the same estimation from Z, independently which variables of the two from zero different coefficients is used as the dependent variable. 2) The valuations do not converge with the square root of the sample size (compared to regressions with stationary variables) but with the sample size against the true value. This property of super consistency implies that the use of the estimated Z in combination with stationary variables is asymptotically equivalent to the use of the true value of Z. After the estimation of the regression the Dickey-Fuller t test is applied to the OLS residuals Z. Thereby, if we have to reject the null hypothesis of non-stationarity of Z we can conclude that a cointegration relationship exists. 8

9 Note: We have to keep in mind that the use of the estimated Z has consequences for the critical values of the ADF test. In comparison to the critical values of the usual Dickey-Fuller the critical values here are in absolute values higher and depend on the number of included variables M. If the cointegration relation contains a deterministic trend we speak about a deterministic cointegration. The critical values for M (at most equals six) can be found out with the table of MacKinnon (1991). To determine the critical values of MacKinnon we use the following formula: K = β + β 1 T -1 + β 2 T -2 T is the sample size and the coefficients of β can be taken from the table of MacKinnon according to the number of variables be considered, depending on the specification of the ADF test equation (constant, trend) and the selected probability value. 9

10 Summary: a) Most of the financial time series are integrated of order one. If they are cointegrated, a linear combination of them (Zt) is stationary: Zt = Y1t - γy2t. It requires that the combination of the time series exhibit the same integration level. Cointegrated time series means that based on a theory a long-term stable relationship between the variables exists. This relation is not satisfied at any point in time and short-term departures appear. If these deviations are stationary then a tendency of back formation exists and a long-term steady state is established. 10

11 b) The three step approach of Engle-Granger for cointegration testing: 1. step: Determination of the integration level of every variable 2. step: Estimation of the cointegration relation with OLS regression: Y =a by Z 3. step: Testing the residuals for stationarity: Z =Y a b Y ADF test: If H 0 is rejected then the variables are cointegrated However, as a result of the OLS residuals the critical values of the ADF test are not correct and we have to use the MacKinnon table. Problem: The Engle-Granger approach refers only to one equation and only one specified cointegration relationship can be analysed. For n variables (n > 2) maximum (n-1) cointegration relationships can theoretically exist. 11

12 V.3.3 Error Correction Model Up to now, we solely considered the control of two or more variables for cointegration. Subsequently the question arise how can we illustrate the dynamic relationship between the cointegrated variables. = Granger representation theorem The theorem says that cointegrated variables have an error correction representation and the same hold reverse, i.e. if for several variables an error correction representation exists then the variables are cointegrated. 12

13 In the bivariate case, for two variables and one cointegrated linear combination Z the model is as follows: - the variables Y 1 and Y 2 are I(1) - both variables are cointegrated, i.e. (Z t-1 = Y 1t-1 a by 2t-1 ) are I(0) Y =λ z c Y c Y ε Y =λ z c Y c Y ε 13

14 Summary: The ECM combines both short-term and long-term relationships of variables in one equation. The short-term relations are incorporated by the variables in first differences (c 1 and c 2 ), whereas the long-term relation are represented by the residuals of the estimated cointegration relationship (Z t = Y 1t-1 a by 2t-1 ). The parameter of the long-term relationship λ defines the rate of adjustment to the new equilibrium. If the long-term relationship is valid then λ have to be negative, and if a departure from the long-term equilibrium appears, the deviation will be reduced in the next period by the value λ. The reciprocal (1/λ) indicates the length of time for a complete adjustment, i.e. after (1/λ) periods the deviation from the equilibrium is completely eliminated. 14

The VAR models discussed so fare are appropriate for modeling I(0) data, like asset returns or growth rates of macroeconomic time series.

The VAR models discussed so fare are appropriate for modeling I(0) data, like asset returns or growth rates of macroeconomic time series. Cointegration The VAR models discussed so fare are appropriate for modeling I(0) data, like asset returns or growth rates of macroeconomic time series. Economic theory, however, often implies equilibrium

More information

Cointegration. Basic Ideas and Key results. Egon Zakrajšek Division of Monetary Affairs Federal Reserve Board

Cointegration. Basic Ideas and Key results. Egon Zakrajšek Division of Monetary Affairs Federal Reserve Board Cointegration Basic Ideas and Key results Egon Zakrajšek Division of Monetary Affairs Federal Reserve Board Summer School in Financial Mathematics Faculty of Mathematics & Physics University of Ljubljana

More information

Is the Forward Exchange Rate a Useful Indicator of the Future Exchange Rate?

Is the Forward Exchange Rate a Useful Indicator of the Future Exchange Rate? Is the Forward Exchange Rate a Useful Indicator of the Future Exchange Rate? Emily Polito, Trinity College In the past two decades, there have been many empirical studies both in support of and opposing

More information

Estimation and Inference in Cointegration Models Economics 582

Estimation and Inference in Cointegration Models Economics 582 Estimation and Inference in Cointegration Models Economics 582 Eric Zivot May 17, 2012 Tests for Cointegration Let the ( 1) vector Y be (1). Recall, Y is cointegrated with 0 cointegrating vectors if there

More information

Chapter 6: Multivariate Cointegration Analysis

Chapter 6: Multivariate Cointegration Analysis Chapter 6: Multivariate Cointegration Analysis 1 Contents: Lehrstuhl für Department Empirische of Wirtschaftsforschung Empirical Research and und Econometrics Ökonometrie VI. Multivariate Cointegration

More information

Cointegration and error correction

Cointegration and error correction EVIEWS tutorial: Cointegration and error correction Professor Roy Batchelor City University Business School, London & ESCP, Paris EVIEWS Tutorial 1 EVIEWS On the City University system, EVIEWS 3.1 is in

More information

Chapter 4: Vector Autoregressive Models

Chapter 4: Vector Autoregressive Models Chapter 4: Vector Autoregressive Models 1 Contents: Lehrstuhl für Department Empirische of Wirtschaftsforschung Empirical Research and und Econometrics Ökonometrie IV.1 Vector Autoregressive Models (VAR)...

More information

Non-Stationary Time Series, Cointegration and Spurious Regression

Non-Stationary Time Series, Cointegration and Spurious Regression Econometrics 2 Fall 25 Non-Stationary Time Series, Cointegration and Spurious Regression Heino Bohn Nielsen 1of32 Motivation: Regression with Non-Stationarity What happens to the properties of OLS if variables

More information

Seminar: Introduction to Cointegration

Seminar: Introduction to Cointegration : Introduction to Cointegration Applied Econometrics Jozef Barunik IES, FSV, UK Summer Semester 2009/2010 Jozef Barunik (IES, FSV, UK) Seminar: Introduction to Cointegration Summer Semester 2009/2010 1

More information

Are the US current account deficits really sustainable? National University of Ireland, Galway

Are the US current account deficits really sustainable? National University of Ireland, Galway Provided by the author(s) and NUI Galway in accordance with publisher policies. Please cite the published version when available. Title Are the US current account deficits really sustainable? Author(s)

More information

Co-integration, Causality, Money and Income in India

Co-integration, Causality, Money and Income in India Co-integration, Causality, Money and Income in India Inder Sekhar Yadav Abstract This paper investigates empirically the existence of a long-run relationship between money supply (MS) and national income

More information

An Empirical Study on the Relationship between Stock Index and the National Economy: The Case of China

An Empirical Study on the Relationship between Stock Index and the National Economy: The Case of China An Empirical Study on the Relationship between Stock Index and the National Economy: The Case of China Ming Men And Rui Li University of International Business & Economics Beijing, People s Republic of

More information

Business cycles and natural gas prices

Business cycles and natural gas prices Business cycles and natural gas prices Apostolos Serletis and Asghar Shahmoradi Abstract This paper investigates the basic stylised facts of natural gas price movements using data for the period that natural

More information

Chapter 9: Univariate Time Series Analysis

Chapter 9: Univariate Time Series Analysis Chapter 9: Univariate Time Series Analysis In the last chapter we discussed models with only lags of explanatory variables. These can be misleading if: 1. The dependent variable Y t depends on lags of

More information

The relationship between stock market parameters and interbank lending market: an empirical evidence

The relationship between stock market parameters and interbank lending market: an empirical evidence Magomet Yandiev Associate Professor, Department of Economics, Lomonosov Moscow State University mag2097@mail.ru Alexander Pakhalov, PG student, Department of Economics, Lomonosov Moscow State University

More information

An Introduction to Time Series Regression

An Introduction to Time Series Regression An Introduction to Time Series Regression Henry Thompson Auburn University An economic model suggests examining the effect of exogenous x t on endogenous y t with an exogenous control variable z t. In

More information

Price efficiency in tuna fish marketing in Sri Lanka - An application of cointegration approach

Price efficiency in tuna fish marketing in Sri Lanka - An application of cointegration approach 21 Sri Lanka J. Aquat. Sci. 11 (2006): 21-26 Price efficiency in tuna fish marketing in Sri Lanka - An application of cointegration approach Y.Y.K. DE SILVA 1, P.S.K. RAJAPAKSHE 2 AMARALAL 3 AND K.H.M.L.

More information

Cointegration and the ECM

Cointegration and the ECM Cointegration and the ECM Two nonstationary time series are cointegrated if they tend to move together through time. For instance, we have established that the levels of the Fed Funds rate and the 3-year

More information

A Trading Strategy Based on the Lead-Lag Relationship of Spot and Futures Prices of the S&P 500

A Trading Strategy Based on the Lead-Lag Relationship of Spot and Futures Prices of the S&P 500 A Trading Strategy Based on the Lead-Lag Relationship of Spot and Futures Prices of the S&P 500 FE8827 Quantitative Trading Strategies 2010/11 Mini-Term 5 Nanyang Technological University Submitted By:

More information

Causality between Government Expenditure and National Income: Evidence from Sudan. Ebaidalla Mahjoub Ebaidalla 1

Causality between Government Expenditure and National Income: Evidence from Sudan. Ebaidalla Mahjoub Ebaidalla 1 Journal of Economic Cooperation and Development, 34, 4 (2013), 61-76 Causality between Government Expenditure and National Income: Evidence from Sudan Ebaidalla Mahjoub Ebaidalla 1 This study aims to determine

More information

Non-Stationary Time Series andunitroottests

Non-Stationary Time Series andunitroottests Econometrics 2 Fall 2005 Non-Stationary Time Series andunitroottests Heino Bohn Nielsen 1of25 Introduction Many economic time series are trending. Important to distinguish between two important cases:

More information

Vector Time Series Model Representations and Analysis with XploRe

Vector Time Series Model Representations and Analysis with XploRe 0-1 Vector Time Series Model Representations and Analysis with plore Julius Mungo CASE - Center for Applied Statistics and Economics Humboldt-Universität zu Berlin mungo@wiwi.hu-berlin.de plore MulTi Motivation

More information

Business Cycles and Natural Gas Prices

Business Cycles and Natural Gas Prices Department of Economics Discussion Paper 2004-19 Business Cycles and Natural Gas Prices Apostolos Serletis Department of Economics University of Calgary Canada and Asghar Shahmoradi Department of Economics

More information

Working Papers. Cointegration Based Trading Strategy For Soft Commodities Market. Piotr Arendarski Łukasz Postek. No. 2/2012 (68)

Working Papers. Cointegration Based Trading Strategy For Soft Commodities Market. Piotr Arendarski Łukasz Postek. No. 2/2012 (68) Working Papers No. 2/2012 (68) Piotr Arendarski Łukasz Postek Cointegration Based Trading Strategy For Soft Commodities Market Warsaw 2012 Cointegration Based Trading Strategy For Soft Commodities Market

More information

Chapter 12: Time Series Models

Chapter 12: Time Series Models Chapter 12: Time Series Models In this chapter: 1. Estimating ad hoc distributed lag & Koyck distributed lag models (UE 12.1.3) 2. Testing for serial correlation in Koyck distributed lag models (UE 12.2.2)

More information

Testing The Quantity Theory of Money in Greece: A Note

Testing The Quantity Theory of Money in Greece: A Note ERC Working Paper in Economic 03/10 November 2003 Testing The Quantity Theory of Money in Greece: A Note Erdal Özmen Department of Economics Middle East Technical University Ankara 06531, Turkey ozmen@metu.edu.tr

More information

Time Series Analysis

Time Series Analysis Time Series Analysis Identifying possible ARIMA models Andrés M. Alonso Carolina García-Martos Universidad Carlos III de Madrid Universidad Politécnica de Madrid June July, 2012 Alonso and García-Martos

More information

The link between unemployment and inflation using Johansen s. co-integration approach and vector error correction modelling.

The link between unemployment and inflation using Johansen s. co-integration approach and vector error correction modelling. Proceedings 59th ISI World Statistics Congress, 25-30 August 2013, Hong Kong (Session CPS102) p.4340 The link between unemployment and inflation using Johansen s co-integration approach and vector error

More information

Do Heating Oil Prices Adjust Asymmetrically To Changes In Crude Oil Prices Paul Berhanu Girma, State University of New York at New Paltz, USA

Do Heating Oil Prices Adjust Asymmetrically To Changes In Crude Oil Prices Paul Berhanu Girma, State University of New York at New Paltz, USA Do Heating Oil Prices Adjust Asymmetrically To Changes In Crude Oil Prices Paul Berhanu Girma, State University of New York at New Paltz, USA ABSTRACT This study investigated if there is an asymmetric

More information

PITFALLS IN TIME SERIES ANALYSIS. Cliff Hurvich Stern School, NYU

PITFALLS IN TIME SERIES ANALYSIS. Cliff Hurvich Stern School, NYU PITFALLS IN TIME SERIES ANALYSIS Cliff Hurvich Stern School, NYU The t -Test If x 1,..., x n are independent and identically distributed with mean 0, and n is not too small, then t = x 0 s n has a standard

More information

Relationship between Stock Futures Index and Cash Prices Index: Empirical Evidence Based on Malaysia Data

Relationship between Stock Futures Index and Cash Prices Index: Empirical Evidence Based on Malaysia Data 2012, Vol. 4, No. 2, pp. 103-112 ISSN 2152-1034 Relationship between Stock Futures Index and Cash Prices Index: Empirical Evidence Based on Malaysia Data Abstract Zukarnain Zakaria Universiti Teknologi

More information

THE IMPACT OF EXCHANGE RATE VOLATILITY ON BRAZILIAN MANUFACTURED EXPORTS

THE IMPACT OF EXCHANGE RATE VOLATILITY ON BRAZILIAN MANUFACTURED EXPORTS THE IMPACT OF EXCHANGE RATE VOLATILITY ON BRAZILIAN MANUFACTURED EXPORTS ANTONIO AGUIRRE UFMG / Department of Economics CEPE (Centre for Research in International Economics) Rua Curitiba, 832 Belo Horizonte

More information

Relationship among crude oil prices, share prices and exchange rates

Relationship among crude oil prices, share prices and exchange rates Relationship among crude oil prices, share prices and exchange rates Do higher share prices and weaker dollar lead to higher crude oil prices? Akira YANAGISAWA Leader Energy Demand, Supply and Forecast

More information

Chapter 5: The Cointegrated VAR model

Chapter 5: The Cointegrated VAR model Chapter 5: The Cointegrated VAR model Katarina Juselius July 1, 2012 Katarina Juselius () Chapter 5: The Cointegrated VAR model July 1, 2012 1 / 41 An intuitive interpretation of the Pi matrix Consider

More information

Financial Integration of Stock Markets in the Gulf: A Multivariate Cointegration Analysis

Financial Integration of Stock Markets in the Gulf: A Multivariate Cointegration Analysis INTERNATIONAL JOURNAL OF BUSINESS, 8(3), 2003 ISSN:1083-4346 Financial Integration of Stock Markets in the Gulf: A Multivariate Cointegration Analysis Aqil Mohd. Hadi Hassan Department of Economics, College

More information

The price-volume relationship of the Malaysian Stock Index futures market

The price-volume relationship of the Malaysian Stock Index futures market The price-volume relationship of the Malaysian Stock Index futures market ABSTRACT Carl B. McGowan, Jr. Norfolk State University Junaina Muhammad University Putra Malaysia The objective of this study is

More information

Relative Effectiveness of Foreign Debt and Foreign Aid on Economic Growth in Pakistan

Relative Effectiveness of Foreign Debt and Foreign Aid on Economic Growth in Pakistan Relative Effectiveness of Foreign Debt and Foreign Aid on Economic Growth in Pakistan Abstract Zeshan Arshad Faculty of Management and Sciences, Evening Program, University of Gujrat, Pakistan. Muhammad

More information

1. The Classical Linear Regression Model: The Bivariate Case

1. The Classical Linear Regression Model: The Bivariate Case Business School, Brunel University MSc. EC5501/5509 Modelling Financial Decisions and Markets/Introduction to Quantitative Methods Prof. Menelaos Karanasos (Room SS69, Tel. 018956584) Lecture Notes 3 1.

More information

MONEY MARKET EQUILIBRIUM IN THE CZECH REPUBLIC

MONEY MARKET EQUILIBRIUM IN THE CZECH REPUBLIC MONEY MARKET EQUILIBRIUM IN THE CZECH REPUBLIC DOI: 10.18267/j.pep.564 Jana 1 Juriová* Abstract This paper examines the theoretical concept of equilibrium in the money market that is empirically verified

More information

Forecasting the US Dollar / Euro Exchange rate Using ARMA Models

Forecasting the US Dollar / Euro Exchange rate Using ARMA Models Forecasting the US Dollar / Euro Exchange rate Using ARMA Models LIUWEI (9906360) - 1 - ABSTRACT...3 1. INTRODUCTION...4 2. DATA ANALYSIS...5 2.1 Stationary estimation...5 2.2 Dickey-Fuller Test...6 3.

More information

Time Series Analysis of the Somalian Export Demand Equations: A Co-integration Approach

Time Series Analysis of the Somalian Export Demand Equations: A Co-integration Approach Journal of Economic and Social Research 4 (2), 71-92 Time Series Analysis of the Somalian Export Demand Equations: A Co-integration Approach Mohamed A. Osman 1 & Scott R. Evans 2 Abstract. In this paper,

More information

The Long-Run Relation Between The Personal Savings Rate And Consumer Sentiment

The Long-Run Relation Between The Personal Savings Rate And Consumer Sentiment The Long-Run Relation Between The Personal Savings Rate And Consumer Sentiment Bradley T. Ewing 1 and James E. Payne 2 This study examined the long run relationship between the personal savings rate and

More information

ANALYSIS OF EUROPEAN, AMERICAN AND JAPANESE GOVERNMENT BOND YIELDS

ANALYSIS OF EUROPEAN, AMERICAN AND JAPANESE GOVERNMENT BOND YIELDS Applied Time Series Analysis ANALYSIS OF EUROPEAN, AMERICAN AND JAPANESE GOVERNMENT BOND YIELDS Stationarity, cointegration, Granger causality Aleksandra Falkowska and Piotr Lewicki TABLE OF CONTENTS 1.

More information

This article appeared in a journal published by Elsevier. The attached copy is furnished to the author for internal non-commercial research and

This article appeared in a journal published by Elsevier. The attached copy is furnished to the author for internal non-commercial research and This article appeared in a journal published by Elsevier. The attached copy is furnished to the author for internal non-commercial research and education use, including for instruction at the authors institution

More information

A cointegration and causality analysis of Scandinavian stock markets

A cointegration and causality analysis of Scandinavian stock markets A cointegration and causality analysis of Scandinavian stock markets Sanda Hubana Trondheim, May 2013 Master s thesis in Financial Economics Norwegian University of Science and Technology Faculty of Social

More information

Medical Net Discount Rates:

Medical Net Discount Rates: Medical Net Discount Rates: An Investigation into the Total Offset Approach Andrew G. Kraynak Fall 2011 COLLEGE OF THE HOLY CROSS ECONOMICS DEPARTMENT HONORS PROGRAM Motivation When estimating the cost

More information

Performing Unit Root Tests in EViews. Unit Root Testing

Performing Unit Root Tests in EViews. Unit Root Testing Página 1 de 12 Unit Root Testing The theory behind ARMA estimation is based on stationary time series. A series is said to be (weakly or covariance) stationary if the mean and autocovariances of the series

More information

Co-movements of NAFTA trade, FDI and stock markets

Co-movements of NAFTA trade, FDI and stock markets Co-movements of NAFTA trade, FDI and stock markets Paweł Folfas, Ph. D. Warsaw School of Economics Abstract The paper scrutinizes the causal relationship between performance of American, Canadian and Mexican

More information

FORECASTING DEPOSIT GROWTH: Forecasting BIF and SAIF Assessable and Insured Deposits

FORECASTING DEPOSIT GROWTH: Forecasting BIF and SAIF Assessable and Insured Deposits Technical Paper Series Congressional Budget Office Washington, DC FORECASTING DEPOSIT GROWTH: Forecasting BIF and SAIF Assessable and Insured Deposits Albert D. Metz Microeconomic and Financial Studies

More information

Empirical Properties of the Indonesian Rupiah: Testing for Structural Breaks, Unit Roots, and White Noise

Empirical Properties of the Indonesian Rupiah: Testing for Structural Breaks, Unit Roots, and White Noise Volume 24, Number 2, December 1999 Empirical Properties of the Indonesian Rupiah: Testing for Structural Breaks, Unit Roots, and White Noise Reza Yamora Siregar * 1 This paper shows that the real exchange

More information

Air passenger departures forecast models A technical note

Air passenger departures forecast models A technical note Ministry of Transport Air passenger departures forecast models A technical note By Haobo Wang Financial, Economic and Statistical Analysis Page 1 of 15 1. Introduction Sine 1999, the Ministry of Business,

More information

FDI and Economic Growth Relationship: An Empirical Study on Malaysia

FDI and Economic Growth Relationship: An Empirical Study on Malaysia International Business Research April, 2008 FDI and Economic Growth Relationship: An Empirical Study on Malaysia Har Wai Mun Faculty of Accountancy and Management Universiti Tunku Abdul Rahman Bander Sungai

More information

The Law of one Price in Global Natural Gas Markets - A Threshold Cointegration Analysis

The Law of one Price in Global Natural Gas Markets - A Threshold Cointegration Analysis The Law of one Price in Global Natural Gas Markets - A Threshold Cointegration Analysis Sebastian Nick a, Benjamin Tischler a, a Institute of Energy Economics, University of Cologne, Vogelsanger Straße

More information

The Effect of Infrastructure on Long Run Economic Growth

The Effect of Infrastructure on Long Run Economic Growth November, 2004 The Effect of Infrastructure on Long Run Economic Growth David Canning Harvard University and Peter Pedroni * Williams College --------------------------------------------------------------------------------------------------------------------

More information

Inflation as a function of labor force change rate: cointegration test for the USA

Inflation as a function of labor force change rate: cointegration test for the USA Inflation as a function of labor force change rate: cointegration test for the USA I.O. Kitov 1, O.I. Kitov 2, S.A. Dolinskaya 1 Introduction Inflation forecasting plays an important role in modern monetary

More information

The effect of Macroeconomic Determinants on the Performance of the Indian Stock Market

The effect of Macroeconomic Determinants on the Performance of the Indian Stock Market The effect of Macroeconomic Determinants on the Performance of the Indian Stock Market 1 Samveg Patel Abstract The study investigates the effect of macroeconomic determinants on the performance of the

More information

The Engle-Granger representation theorem

The Engle-Granger representation theorem The Engle-Granger representation theorem Reference note to lecture 10 in ECON 5101/9101, Time Series Econometrics Ragnar Nymoen March 29 2011 1 Introduction The Granger-Engle representation theorem is

More information

National Institute for Applied Statistics Research Australia. Working Paper

National Institute for Applied Statistics Research Australia. Working Paper National Institute for Applied Statistics Research Australia The University of Wollongong Working Paper 10-14 Cointegration with a Time Trend and Pairs Trading Strategy: Empirical Study on the S&P 500

More information

Minimum LM Unit Root Test with One Structural Break. Junsoo Lee Department of Economics University of Alabama

Minimum LM Unit Root Test with One Structural Break. Junsoo Lee Department of Economics University of Alabama Minimum LM Unit Root Test with One Structural Break Junsoo Lee Department of Economics University of Alabama Mark C. Strazicich Department of Economics Appalachian State University December 16, 2004 Abstract

More information

Real Exchange Rates and Real Interest Differentials: The Case of a Transitional Economy - Cambodia

Real Exchange Rates and Real Interest Differentials: The Case of a Transitional Economy - Cambodia Department of Economics Issn 1441-5429 Discussion paper 08/10 Real Exchange Rates and Real Interest Differentials: The Case of a Transitional Economy - Cambodia Tuck Cheong Tang 1 Abstract: This study

More information

TEMPORAL CAUSAL RELATIONSHIP BETWEEN STOCK MARKET CAPITALIZATION, TRADE OPENNESS AND REAL GDP: EVIDENCE FROM THAILAND

TEMPORAL CAUSAL RELATIONSHIP BETWEEN STOCK MARKET CAPITALIZATION, TRADE OPENNESS AND REAL GDP: EVIDENCE FROM THAILAND I J A B E R, Vol. 13, No. 4, (2015): 1525-1534 TEMPORAL CAUSAL RELATIONSHIP BETWEEN STOCK MARKET CAPITALIZATION, TRADE OPENNESS AND REAL GDP: EVIDENCE FROM THAILAND Komain Jiranyakul * Abstract: This study

More information

The Trade Balance Effects of U.S. Foreign Direct Investment in Mexico

The Trade Balance Effects of U.S. Foreign Direct Investment in Mexico The Trade Balance Effects of U.S. Foreign Direct Investment in Mexico PETER WILAMOSKI AND SARAH TINKLER* This paper examines the effect of U.S. foreign direct investment (FDI) in Mexico on U.S. exports

More information

The information content of lagged equity and bond yields

The information content of lagged equity and bond yields Economics Letters 68 (2000) 179 184 www.elsevier.com/ locate/ econbase The information content of lagged equity and bond yields Richard D.F. Harris *, Rene Sanchez-Valle School of Business and Economics,

More information

The Co-integration of European Stock Markets after the Launch of the Euro

The Co-integration of European Stock Markets after the Launch of the Euro PANOECONOMICUS, 2008, 3, str. 309-324 UDC 336.76(4-672 EU:497):339.92 ORIGINAL SCIENTIFIC PAPER The Co-integration of European Stock Markets after the Launch of the Euro José Soares da Fonseca * Summary:

More information

ijcrb.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS AUGUST 2014 VOL 6, NO 4

ijcrb.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS AUGUST 2014 VOL 6, NO 4 RELATIONSHIP AND CAUSALITY BETWEEN INTEREST RATE AND INFLATION RATE CASE OF JORDAN Dr. Mahmoud A. Jaradat Saleh A. AI-Hhosban Al al-bayt University, Jordan ABSTRACT This study attempts to examine and study

More information

Trading Basket Construction. Mean Reversion Trading. Haksun Li haksun.li@numericalmethod.com www.numericalmethod.com

Trading Basket Construction. Mean Reversion Trading. Haksun Li haksun.li@numericalmethod.com www.numericalmethod.com Trading Basket Construction Mean Reversion Trading Haksun Li haksun.li@numericalmethod.com www.numericalmethod.com Speaker Profile Dr. Haksun Li CEO, Numerical Method Inc. (Ex-)Adjunct Professors, Industry

More information

The Relationship between Current Account and Government Budget Balance: The Case of Kuwait

The Relationship between Current Account and Government Budget Balance: The Case of Kuwait International Journal of Humanities and Social Science Vol. 2 No. 7; April 2012 The Relationship between Current Account and Government Budget Balance: The Case of Kuwait Abstract Ebrahim Merza Economics

More information

The Feeble Link between Exchange Rates and Fundamentals: Can We Blame the Discount Factor?

The Feeble Link between Exchange Rates and Fundamentals: Can We Blame the Discount Factor? LUCIO SARNO ELVIRA SOJLI The Feeble Link between Exchange Rates and Fundamentals: Can We Blame the Discount Factor? Recent research demonstrates that the well-documented feeble link between exchange rates

More information

SYSTEMS OF REGRESSION EQUATIONS

SYSTEMS OF REGRESSION EQUATIONS SYSTEMS OF REGRESSION EQUATIONS 1. MULTIPLE EQUATIONS y nt = x nt n + u nt, n = 1,...,N, t = 1,...,T, x nt is 1 k, and n is k 1. This is a version of the standard regression model where the observations

More information

EXPORT INSTABILITY, INVESTMENT AND ECONOMIC GROWTH IN ASIAN COUNTRIES: A TIME SERIES ANALYSIS

EXPORT INSTABILITY, INVESTMENT AND ECONOMIC GROWTH IN ASIAN COUNTRIES: A TIME SERIES ANALYSIS ECONOMIC GROWTH CENTER YALE UNIVERSITY P.O. Box 208269 27 Hillhouse Avenue New Haven, Connecticut 06520-8269 CENTER DISCUSSION PAPER NO. 799 EXPORT INSTABILITY, INVESTMENT AND ECONOMIC GROWTH IN ASIAN

More information

How do oil prices affect stock returns in GCC markets? An asymmetric cointegration approach.

How do oil prices affect stock returns in GCC markets? An asymmetric cointegration approach. How do oil prices affect stock returns in GCC markets? An asymmetric cointegration approach. Mohamed El Hedi AROURI (LEO-Université d Orléans & EDHEC, mohamed.arouri@univ-orleans.fr) Julien FOUQUAU (ESC

More information

C: LEVEL 800 {MASTERS OF ECONOMICS( ECONOMETRICS)}

C: LEVEL 800 {MASTERS OF ECONOMICS( ECONOMETRICS)} C: LEVEL 800 {MASTERS OF ECONOMICS( ECONOMETRICS)} 1. EES 800: Econometrics I Simple linear regression and correlation analysis. Specification and estimation of a regression model. Interpretation of regression

More information

On the long run relationship between gold and silver prices A note

On the long run relationship between gold and silver prices A note Global Finance Journal 12 (2001) 299 303 On the long run relationship between gold and silver prices A note C. Ciner* Northeastern University College of Business Administration, Boston, MA 02115-5000,

More information

AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE

AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP AMONG P/E RATIO, STOCK RETURN AND DIVIDEND YIELS FOR ISTANBUL STOCK EXCHANGE Funda H. SEZGIN Mimar Sinan Fine Arts University, Faculty of Science and Letters

More information

Trends and Breaks in Cointegrated VAR Models

Trends and Breaks in Cointegrated VAR Models Trends and Breaks in Cointegrated VAR Models Håvard Hungnes Thesis for the Dr. Polit. degree Department of Economics, University of Oslo Defended March 17, 2006 Research Fellow in the Research Department

More information

Electricity Price Forecasting in the Spanish Market using Cointegration Techniques

Electricity Price Forecasting in the Spanish Market using Cointegration Techniques 1 Electricity Price Forecasting in the Spanish Market using Cointegration Techniques Antonio Bello, Javier Reneses Abstract This paper proposes a medium-term equilibrium model which aims to explain the

More information

The Impact of Foreign Direct Investment and Real Exchange Rate on Economic Growth in Malaysia: Some Empirical Evidence

The Impact of Foreign Direct Investment and Real Exchange Rate on Economic Growth in Malaysia: Some Empirical Evidence Malaysian Journal of Business and Economics Vol. 1, No. 1, June 2014, 73 85 ISSN 2289-6856 The Impact of Foreign Direct Investment and Real Exchange Rate on Economic Growth in Malaysia: Rozilee Asid a,

More information

Electricity Demand for Sri Lanka: A Time Series Analysis

Electricity Demand for Sri Lanka: A Time Series Analysis SEEDS Surrey Energy Economics Discussion paper Series SURREY ENERGY ECONOMICS CENTRE Electricity Demand for Sri Lanka: A Time Series Analysis Himanshu A. Amarawickrama and Lester C Hunt October 2007 SEEDS

More information

Keywords: interest rate linkages; cointegration; financial integration; error correction models JEL classification: F36

Keywords: interest rate linkages; cointegration; financial integration; error correction models JEL classification: F36 Vuyyuri, S. Linkages of Indian Interest Rates LINKAGES OF INDIAN INTEREST RATES WITH US AND JAPANESE RATES VUYYURI, Srivyali * Abstract The reform process in India has gradually integrated the Indian financial

More information

Granger Causality between Government Revenues and Expenditures in Korea

Granger Causality between Government Revenues and Expenditures in Korea Volume 23, Number 1, June 1998 Granger Causality between Government Revenues and Expenditures in Korea Wan Kyu Park ** 2 This paper investigates the Granger causal relationship between government revenues

More information

The Nominal-to-Real Transformation

The Nominal-to-Real Transformation The Nominal-to-Real Transformation Hans Christian Kongsted PhD course at Sandbjerg, May 2 Based on: Testing the nominal-to-real transformation, J. Econometrics (25) Nominal-to-real transformation: Reduce

More information

OLS is not only unbiased it is also the most precise (efficient) unbiased estimation technique - ie the estimator has the smallest variance

OLS is not only unbiased it is also the most precise (efficient) unbiased estimation technique - ie the estimator has the smallest variance Lecture 5: Hypothesis Testing What we know now: OLS is not only unbiased it is also the most precise (efficient) unbiased estimation technique - ie the estimator has the smallest variance (if the Gauss-Markov

More information

LINKING MONEY SUPPLY WITH THE GROSS DOMESTIC PRODUCT IN ROMANIA

LINKING MONEY SUPPLY WITH THE GROSS DOMESTIC PRODUCT IN ROMANIA LINKING MONEY SUPPLY WITH THE GROSS DOMESTIC PRODUCT IN ROMANIA Daniela Zapodeanu 1 Mihail Ioan Cociuba 2 ABSTRACT: Evolution of money supply and gross domestic product are in a close relationship, in

More information

IMPACT OF FOREIGN EXCHANGE RESERVES ON NIGERIAN STOCK MARKET Olayinka Olufisayo Akinlo, Obafemi Awolowo University, Ile-Ife, Nigeria

IMPACT OF FOREIGN EXCHANGE RESERVES ON NIGERIAN STOCK MARKET Olayinka Olufisayo Akinlo, Obafemi Awolowo University, Ile-Ife, Nigeria International Journal of Business and Finance Research Vol. 9, No. 2, 2015, pp. 69-76 ISSN: 1931-0269 (print) ISSN: 2157-0698 (online) www.theibfr.org IMPACT OF FOREIGN EXCHANGE RESERVES ON NIGERIAN STOCK

More information

Is the Basis of the Stock Index Futures Markets Nonlinear?

Is the Basis of the Stock Index Futures Markets Nonlinear? University of Wollongong Research Online Applied Statistics Education and Research Collaboration (ASEARC) - Conference Papers Faculty of Engineering and Information Sciences 2011 Is the Basis of the Stock

More information

British Journal of Economics, Finance and Management Sciences 22 June 2016, Vol. 12 (1)

British Journal of Economics, Finance and Management Sciences 22 June 2016, Vol. 12 (1) British Journal of Economics, Finance and Management Sciences 22 The Inflation-Unemployment Tradeoff in a Macroeconometric Model Camelia Ştefan The Bucharest University of Economic Studies, Bucharest,

More information

Department of Economics

Department of Economics Department of Economics Working Paper Do Stock Market Risk Premium Respond to Consumer Confidence? By Abdur Chowdhury Working Paper 2011 06 College of Business Administration Do Stock Market Risk Premium

More information

THE EFFECTS OF BANKING CREDIT ON THE HOUSE PRICE

THE EFFECTS OF BANKING CREDIT ON THE HOUSE PRICE THE EFFECTS OF BANKING CREDIT ON THE HOUSE PRICE * Adibeh Savari 1, Yaser Borvayeh 2 1 MA Student, Department of Economics, Science and Research Branch, Islamic Azad University, Khuzestan, Iran 2 MA Student,

More information

1 Cointegration. ECONOMICS 266, Spring, 1997 Bent E. Sørensen March 1, 2005

1 Cointegration. ECONOMICS 266, Spring, 1997 Bent E. Sørensen March 1, 2005 ECONOMICS 266, Spring, 1997 Bent E. Sørensen March 1, 2005 1 Cointegration. The survey by Campbell and Perron (1991) is a very good supplement to this chapter - for further study read Watson s survey for

More information

Stock Returns and Equity Premium Evidence Using Dividend Price Ratios and Dividend Yields in Malaysia

Stock Returns and Equity Premium Evidence Using Dividend Price Ratios and Dividend Yields in Malaysia Stock Returns and Equity Premium Evidence Using Dividend Price Ratios and Dividend Yields in Malaysia By David E. Allen 1 and Imbarine Bujang 1 1 School of Accounting, Finance and Economics, Edith Cowan

More information

Testing, Monitoring, and Dating Structural Changes in Exchange Rate Regimes

Testing, Monitoring, and Dating Structural Changes in Exchange Rate Regimes Testing, Monitoring, and Dating Structural Changes in Exchange Rate Regimes Achim Zeileis http://eeecon.uibk.ac.at/~zeileis/ Overview Motivation Exchange rate regimes Exchange rate regression What is the

More information

The Power of the KPSS Test for Cointegration when Residuals are Fractionally Integrated

The Power of the KPSS Test for Cointegration when Residuals are Fractionally Integrated The Power of the KPSS Test for Cointegration when Residuals are Fractionally Integrated Philipp Sibbertsen 1 Walter Krämer 2 Diskussionspapier 318 ISNN 0949-9962 Abstract: We show that the power of the

More information

Unit Labor Costs and the Price Level

Unit Labor Costs and the Price Level Unit Labor Costs and the Price Level Yash P. Mehra A popular theoretical model of the inflation process is the expectationsaugmented Phillips-curve model. According to this model, prices are set as markup

More information

I. Basic concepts: Buoyancy and Elasticity II. Estimating Tax Elasticity III. From Mechanical Projection to Forecast

I. Basic concepts: Buoyancy and Elasticity II. Estimating Tax Elasticity III. From Mechanical Projection to Forecast Elements of Revenue Forecasting II: the Elasticity Approach and Projections of Revenue Components Fiscal Analysis and Forecasting Workshop Bangkok, Thailand June 16 27, 2014 Joshua Greene Consultant IMF-TAOLAM

More information

SHORT RUN AND LONG RUN DYNAMICS OF RESIDENTIAL ELECTRICITY CONSUMPTION: HOMOGENEOUS AND HETEROGENEOUS PANEL ESTIMATIONS FOR OECD

SHORT RUN AND LONG RUN DYNAMICS OF RESIDENTIAL ELECTRICITY CONSUMPTION: HOMOGENEOUS AND HETEROGENEOUS PANEL ESTIMATIONS FOR OECD Professor Faik BĐLGĐLĐ, PhD E-mail: fbilgili@erciyes.edu.tr Department of Economics, Faculty of Economics and Administrative Sciences, Erciyes University, Turkey Assistant Professor Yalçın PAMUK, PhD E-mail:

More information

Serhat YANIK* & Yusuf AYTURK*

Serhat YANIK* & Yusuf AYTURK* LEAD-LAG RELATIONSHIP BETWEEN ISE 30 SPOT AND FUTURES MARKETS Serhat YANIK* & Yusuf AYTURK* Abstract The lead-lag relationship between spot and futures markets indicates which market leads to the other.

More information

Relationship between Commodity Prices and Exchange Rate in Light of Global Financial Crisis: Evidence from Australia

Relationship between Commodity Prices and Exchange Rate in Light of Global Financial Crisis: Evidence from Australia Relationship between Commodity Prices and Exchange Rate in Light of Global Financial Crisis: Evidence from Australia Omar K. M. R. Bashar and Sarkar Humayun Kabir Abstract This study seeks to identify

More information

Public / Private Investment Linkages: A Multivariate Cointegration Analysis

Public / Private Investment Linkages: A Multivariate Cointegration Analysis The Pakistan Development Review 44 : 4 Part II (Winter 2005) pp. 805 87 Public / Private Investment Linkages: A Multivariate Cointegration Analysis ABDUL RASHID * I. INTRODUCTION The issue of whether public

More information

Economic Activity and Crime in the Long Run: An Empirical Investigation on Aggregate Data from Italy, 1951 1994

Economic Activity and Crime in the Long Run: An Empirical Investigation on Aggregate Data from Italy, 1951 1994 Economic Activity and Crime in the Long Run: An Empirical Investigation on Aggregate Data from Italy, 1951 1994 ANTONELLO E. SCORCU and ROBERTO CELLINI Department of Economics, University of Bologna, Bologna,

More information

IS THERE A LONG-RUN RELATIONSHIP

IS THERE A LONG-RUN RELATIONSHIP 7. IS THERE A LONG-RUN RELATIONSHIP BETWEEN TAXATION AND GROWTH: THE CASE OF TURKEY Salih Turan KATIRCIOGLU Abstract This paper empirically investigates long-run equilibrium relationship between economic

More information