EES 0836 Study Guide - Quiz Guide: Identity Matrix, Cointegration, Coefficient Matrix
27 May 2016
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The most important problem with both these techniques is that in the general case above, where we have more than two variables which may be cointegrated, there could be more than one cointegrating relationship. In fact there can be up to r linearly independent cointegrating vectors (where r g-1), where g is the number of variables in total. So, in the case where we just had y and x, then r can only be one or zero. But in the general case there could be more cointegrating relationships. The answer to this is to use a systems approach to cointegration which will allow determination of all r cointegrating relationships - johansen"s method. Testing for and estimating cointegrating systems using the johansen technique. Is a long run coefficient matrix since all the yt-i = 0. Review of matrix algebra necessary for the johansen test.
