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Explaining Cointegration Analysis: Part 1

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  • David F. Hendry
  • Katarina Juselius

Abstract

'Classical' econometric theory assumes that observed data come from a stationary process, where means and variances are constant over time. Graphs of economic time series, and the historical record of economic forecasting, reveal the invalidity of such an assumption. Consequently, we discuss the importance of stationarity for empirical modeling and inference; describe the effects of incorrectly assuming stationarity; explain the basic concepts ofnon -stationarity; note some sources of non-stationarity; formulate a class of non -stationary processes (autoregressions with unit roots) that seem empirically relevant for analyzing economic time series; and show when an analysis can be transformed by means of differencing and cointegrating combinations so stationarity becomes a reasonable assumption. We then describe how to test for unit roots and cointegration. Monte Carlo simulations and empirical examples illustrate the analysis.

Suggested Citation

  • David F. Hendry & Katarina Juselius, 2000. "Explaining Cointegration Analysis: Part 1," The Energy Journal, , vol. 21(1), pages 1-42, January.
    • Handle: RePEc:sae:enejou:v:21:y:2000:i:1:p:1-42
    DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No1-1
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    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    2. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2.
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    4. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
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    More about this item

    Keywords

    Cointegration; empirical modeling; gasoline prices;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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