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Johansen test

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Title: Johansen test  
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Subject: Error correction model, Time series analysis, Statistical tests, Mathematical finance, Record value
Collection: Mathematical Finance, Statistical Tests, Time Series Analysis
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Johansen test

In statistics, the Johansen test,[1] named after Søren Johansen, is a procedure for testing cointegration of several, say k, I(1) time series. This test permits more than one cointegrating relationship so is more generally applicable than the Engle–Granger test which is based on the Dickey–Fuller (or the augmented) test for unit roots in the residuals from a single (estimated) cointegrating relationship.[2]

There are two types of Johansen test, either with trace or with eigenvalue, and the inferences might be a little bit different. The null hypothesis for the trace test is that the number of cointegration vectors is r=r*

Just like a unit root test, there can be a constant term, a trend term, both, or neither in the model. For a general VAR(p) model:

X_{t}=\mu+\Phi D_{t}+\Pi_{p}X_{t-p}+\cdots+\Pi_{1}X_{t-1}+e_{t},\quad t=1,\dots,T

There are two possible specifications for error correction: that is, two VECM (vector error correction models):

1. The longrun VECM:

\Delta X_t =\mu+\Phi D_{t}+\Pi X_{t-p}+\Gamma_{p-1}\Delta X_{t-p+1}+\cdots+\Gamma_{1}\Delta X_{t-1}+\varepsilon_t,\quad t=1,\dots,T
where
\Gamma_i = \Pi_1 + \cdots + \Pi_i - I,\quad i=1,\dots,p-1. \,

2. The transitory VECM:

\Delta X_{t}=\mu+\Phi D_{t}-\Gamma_{p-1}\Delta X_{t-p+1}-\cdots-\Gamma_{1}\Delta X_{t-1}+\Pi X_{t-1}+\varepsilon_{t},\quad t=1,\cdots,T
where
\Gamma_i = \left(\Pi_{i+1}+\cdots+\Pi_p\right),\quad i=1,\dots,p-1. \,

Be aware that the two are the same. In both VECM (Vector Error Correction Model),

\Pi=\Pi_{1}+\cdots+\Pi_{p}-I. \,

Inferences are drawn on Π, and they will be the same, so is the explanatory power.

References

  1. ^
  2. ^

Further reading


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