Consider the following vector error correction (VECM) model: $\Delta$y_t = y_t-₅ + ₁$\Delta$y_t-₁ + ₂$\Delta$y_t-₂ + ₃$\Delta$y_t-₃ + ₄$\Delta$y_t-₄ + u_t Where y_t is a k* 1 vector of variables, and u_t is a k* 1 vector of disturbances. Which of the following statements is true of the VECM? A) Johansen's test for cointegration centres on the rank of the matrix ₁ B) If the variables y_t are cointegrated, will be of full rank C) If the rank of is zero, the variables are cointegrated D) Provided that all of the series in y are nonstationary, the rank of can be at most k-1.

Question

Quizplus · Accepted Answer

The rank of the matrix Π in a VECM indicates the number of cointegrating relationships. If all series are nonstationary, the rank of Π can be at most k-1, where k is the number of variables.

Consider the Following Vector Error Correction (VECM) Model Δ\DeltaΔ Yt = Yt-5 + 1

Consider the Following Vector Error Correction (VECM) Model $\Delta$ Y_t = Y_t-₅ + ₁