Yes:
Stationarity
No:
Stationarity
Second stage: Cointegration
Maximum lag value is decided on AIC and
BIC basis and HQC. The F value for the
cointegration test should be applied for all
criteria (BIC, AIC, HQC).
Yes: Cointegration
If cointegration evidence is inconclusive,
then the decision about the long-run
relationship is based on the ECT.
No: Cointegration
Are long-run coe
fficients significant?
Do they have the correct sign?
We need to augment the
Granger-type causality test model
with one period lagged ECT
If we find no evidence of
cointegration, then the
specification will be a vector
autoregression (VAR) in 1st
di
fference form (
Liu 2009
)
Even if the ECT is incorporated in
all equations of the Granger
causality model, only in the
equations where the null
hypothesis of no cointegration is
rejected, will be estimated with an
ECT (
Narayan and Smyth 2006
).
Is the cointegration equation robust?
Answer: Use the FMOLS, DOLS to check.
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