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2011-11-21
Bo Sj draft only


Testing for Cointegration in EViews - Instructions
Read in the data
Open Workfile
Under Object chose New Object
Next chose VAR
In the window VAR !ecification, under VAR T"!e, chose #nrestricted VAR

In Endogenous Variables write in the aria!le na"es
In this case# $p $s $psa
Specify the n%"!er of la&s in '() in $ag Inter%als for Endogenous*

+or , la&s in the '() yo% write & ' -WARNING NOT LOGICAL COOMAND STRUCTURE.
Nor"ally, yo% will try different la& str%ct%res here*

Now, /sti"ate the "odel

0est the "odel# Under View yo% will find Residual tests, since the resid%als sho%ld !e nor"ally
distri!%ted white noise yo% hae to test for that* In this case it is "ore serio%s than %nder ()I1(
"odelin&* 0est for a%tocorrelation, -2 and $1 test, Nor"ality -3B., . If yo% %se other pro&ra"s
deeloped in cooperation with 3ohansen, li4e 5(0S in )(0S and 6c7ie, yo% will see "ore test
options* 0ypically, there will !e ()58 test and )/S/0 test* In addition $1, 3B and ()58 will also !e
shown as ector tests as well, "eanin& that the resid%als are pooled across the e9%ations to
represent the whole syste"*

:ith this data yo% can only opt for no a%tocorrelation* 0he pro!le"s with non-nor"al resid%als
cannot !e soled in this data*

/'iews has adanta&e for the '(), which is the test for la& len&th in the '()* Under View, chose $ag
tructure and $ag $ength Criteria( In the latter window yo% &et ario%s infor"ation criteria*
8oweer, these criteria are so"ewhat %sef%l, !%t they are only opti"al for those who want to
forecast* In a cointe&ration test yo% are loo4in& for a correctly specified "odel with nor"ally
distri!%ted error ter"s with no a%tocorrelation with as few la&s as possi!le, which is needed for the
test* 0ypically, i"p%lse d%""ies are needed to i"proe the "odel -Not with this data., which is also
the reason why yo% sho%ld inspect the resid%als for o%tliers*

Once yo% find a &ood '() representation for the data* ;o% can test for cointe&ration*
Under 'iew chose Cointegration Test) %se the standard option for testin&, 1odel <. with
%nrestricted constant* 0he other options are only s%ita!le if 1odel <. does not wor4 -no
cointe&ration* 1odel 2. or 1odel ,. "i&ht !e alternatie options*

Notice# ;o% do not !other a!o%t the /i&en al%e-$"ax. "ax test* ;o% only loo4 at the 0race-test*
Both /'iews and /nders need to !e %pdated on this s%!ject* 0he so-called /i&enal%e "ax-test is not
asy"ptotically correct, as disc%ssed in 3ohansen -1==>.* Neer !other a!o%t the standard errors of
esti"ated Beta ector aria!les*
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Once yo% decided on the n%"!er of cointe&ratin& ectors yo% can loo4 a st%dy what the '/51 loo4s
li4e in ter"s of alpha and !eta para"eters*

Next, the esti"ated ector can !e tested* By i"posin& restrictions on the ector the test !eco"es a
9%estion if the ector is still stationary after the restrictions hae !een i"posed* If the ector is still
stationary the restrictions are alid*

Under View, Cointegration Test and VEC Restrictions is it possi!le, but this is not ad%isable* /'iews
has too "any pec%liarities when it co"es to cointe&ration "odels to %se this option*

0herefore#
0o i"pose restrictions, &o to Esti*ate, %nder +asics indicate Vector Error Correction( NE,T AN-
T.I I I/0ORTANT RE-#CE T.E $A1 $EN1T. +2 -& IN T.E $A1 $EN1T. 3OR EN-O1ENO#( A
"ou go fro* the VAR to the VEC/ "ou dro! one lag in the *odel( 4all other !rogra*s do this
auto*aticall") but not EViews5(

Under Cointegrating i"pose the n%"!er of si&nificant ectors*
;o% can now esti"ate the '/51*
Next !ac4 to Esti*ation and chose VEC Restrictions* -:hat /'iews call '/5 is called '/51 in all
other pro&ra"s and text!oo4s*.

+4r)&5 indicate the cointe&ratin& ector n%"!er r, and para"eter 1 in that ector*
0h%s to nor"ali?e the ector aro%nd the first aria!le, in the first ector aro%nd %nity +4&)&5 6 &

0o set the second para"eter in the first ector to say -0*@@, write +4&)75 6 -8(99 etc*
0o restrict an alpha al%e write, (-4,r. where 4 refers to the n%"!er of the alpha in cointe&ratin&
ector n%"!er r*

)e"e"!er that yo% are entitled to i"pose the al%e of 1*0, to nor"ali?e the ector and this is not
co%nted as a restriction*

:ith "ore than one ector thin&s are "ore co"plex when it co"es to i"posin& restrictions* ;o%
"%st nor"ali?e each ector !%t also identify the ectors, !y i"posin& alid restrictions that
separates the ector fro" each other* 0his can !e done int%itiely to so"e extent, !%t in the end one
"%st calc%late the correct de&rees of freedo", which is a !it "ore co"plex exercise *