Co-integration:

Two series x and y are not stationary but linear combination of these series is stationary. Then these
series x and y are co-integrated.

Z=Q1 X+Q2 Y

If in short tern there is short term disequilibrium than we will see that in how much time this
disequilibrium is corrected in how much time.

There can be theory in back of this co-integration. Or this theory may not be there.

First stage of co-integration: whether two series are co-integrated or not

Second stage: What are the determinants of this integration?

What are steps of this?

Data is stationary or not

A. If stationary than regression analysis

B. If not than level of integration is checked (when it will be stationary)
1. If level of integration is same than J.J Approach is used

Co-integration exists or co integration does not exist...

If co-integration exists than Error Correction Method ECM will be used and in this Granger casualty test
will be used (uni directional granger causality- bi directional casualty)

if co-integration is not there that VAR model will be used. And VDA

2. If level of integration is not same than ARDL approach is used.

Log of AUX is integrated at level 1 I(0) so JJ approach will be used.

Log of AUD is integrated at level 1 I(0)

Yt=β0+β1yt-1+β2 t-1+β3t

Null Hypothesis: D(LAUD) has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=31)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -73.89303 0.0001

Test critical values: 1% level -3.431525
5% level -2.861944
10% level -2.567028
*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LAUD,2)
Method: Least Squares
Date: 08/16/19 Time: 19:11
Sample (adjusted): 8/11/2000 8/08/2019
Included observations: 4820 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(LAUD(-1)) -1.062426 0.014378 -73.89303 0.0000

C 3.34E-05 0.000118 0.283430 0.7769

R-squared 0.531240 Mean dependent var -6.93E-07

Adjusted R-squared 0.531143 S.D. dependent var 0.011959
S.E. of regression 0.008189 Akaike info criterion -6.771640
Sum squared resid 0.323092 Schwarz criterion -6.768951
Log likelihood 16321.65 Hannan-Quinn criter. -6.770696
F-statistic 5460.180 Durbin-Watson stat 2.000587
Prob(F-statistic) 0.000000

VAR Lag Order Selection Criteria

Endogenous variables: LAUD LAUX
Exogenous variables: C
Date: 08/16/19 Time: 20:02
Sample: 8/09/2000 8/08/2019
Included observations: 4814

Lag LogL LR FPE AIC SC HQ

0 -1766.850 NA 0.007148 0.734877 0.737569 0.735823

1 29838.77 63171.86 1.42e-08 -12.39417 -12.38610 -12.39134
2 29889.10 100.5529 1.39e-08 -12.41342 -12.39996* -12.40869*
3 29895.31 12.39905 1.39e-08 -12.41434 -12.39550 -12.40772
4 29897.52 4.399178 1.39e-08 -12.41359 -12.38937 -12.40508
5 29903.84 12.61051 1.39e-08 -12.41456 -12.38495 -12.40416
6 29906.30 4.921960 1.39e-08 -12.41392 -12.37892 -12.40163
7 29910.03 7.430895 1.39e-08 -12.41381 -12.37343 -12.39963
8 29917.15 14.19476* 1.39e-08* -12.41510* -12.36934 -12.39903

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion

AIC or SC is used for lag criteria

Puntula principle

Date: 08/16/19 Time: 20:08

Sample: 8/09/2000 8/08/2019
Included observations: 4813
Series: LAUX LAUD
Lags interval: 1 to 8

Selected
(0.05 level*)
Number of
Cointegrating
Relations by
Model

Data Trend: None None Linear Linear Quadratic

Test Type No Intercept Intercept Intercept Intercept Intercept
No Trend No Trend No Trend Trend Trend
Trace 0 0 0 0 0
Max-Eig 0 0 0 0 0

*Critical values based on MacKinnon-Haug-Michelis (1999)

Information
Criteria by
Rank and
Model

Data Trend: None None Linear Linear Quadratic

Rank or No Intercept Intercept Intercept Intercept Intercept
No. of CEs No Trend No Trend No Trend Trend Trend

Log
Likelihood by
Rank (rows)
and Model
(columns)
0 29907.68 29907.68 29909.94 29909.94 29910.93
1 29910.70 29910.70 29911.61 29911.93 29912.87
2 29911.60 29911.61 29911.61 29913.56 29913.56

Akaike
Information
Criteria by
Rank (rows)
and Model
(columns)
0 -12.41458 -12.41458 -12.41469* -12.41469* -12.41427
1 -12.41417 -12.41376 -12.41372 -12.41343 -12.41341
2 -12.41288 -12.41206 -12.41206 -12.41203 -12.41203

Schwarz
Criteria by
Rank (rows)
and Model
(columns)
0 -12.37150* -12.37150* -12.36892 -12.36892 -12.36580
1 -12.36571 -12.36395 -12.36256 -12.36093 -12.35956
 2 -12.35904 -12.35552 -12.35552 -12.35280 -12.35280

All answer are zero so we will use third will be used now.

Date: 08/16/19 Time: 20:07

Sample (adjusted): 8/22/2000 8/08/2019
Included observations: 4813 after adjustments
Trend assumption: Linear deterministic trend
Series: LAUX LAUD
Lags interval (in first differences): 1 to 8

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None 0.000693 3.341966 15.49471 0.9492

At most 1 8.47E-07 0.004079 3.841466 0.9478

Trace test indicates no cointegration at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None 0.000693 3.337887 14.26460 0.9217

At most 1 8.47E-07 0.004079 3.841466 0.9478

Max-eigenvalue test indicates no cointegration at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):

LAUX LAUD
0.246522 4.745207
2.307867 -3.959400

Unrestricted Adjustment Coefficients (alpha):

D(LAUX) -0.000192 1.15E-05

D(LAUD) -0.000195 -3.13E-06

1 Cointegrating Equation(s): Log likelihood 29911.61

Normalized cointegrating coefficients (standard error in parentheses)

LAUX LAUD
1.000000 19.24865
(11.4293)
Adjustment coefficients (standard error in parentheses)
D(LAUX) -4.73E-05
(5.1E-05)
D(LAUD) -4.81E-05
(2.9E-05)

Vector Autoregression Estimates

Date: 08/16/19 Time: 20:12
Sample (adjusted): 8/21/2000 8/08/2019
Included observations: 4814 after adjustments
Standard errors in ( ) & t-statistics in [ ]

LAUX LAUD

LAUX(-1) 0.956569 -0.004031

(0.01449) (0.00819)
[ 65.9969] [-0.49195]

LAUX(-2) -0.004082 0.013801

(0.02007) (0.01135)
[-0.20343] [ 1.21633]

LAUX(-3) 0.060200 -0.011288

(0.02008) (0.01135)
[ 2.99807] [-0.99427]

LAUX(-4) -0.028425 0.001627

(0.02010) (0.01136)
[-1.41443] [ 0.14320]

LAUX(-5) 0.031837 -0.003753

(0.02009) (0.01136)
[ 1.58440] [-0.33036]

LAUX(-6) -0.023028 0.003515

(0.02008) (0.01135)
[-1.14681] [ 0.30962]

LAUX(-7) 0.002083 0.012611

(0.02001) (0.01131)
[ 0.10411] [ 1.11493]

LAUX(-8) 0.004840 -0.012546

(0.01439) (0.00813)
[ 0.33639] [-1.54227]

LAUD(-1) 0.211350 0.939775

(0.02563) (0.01449)
[ 8.24527] [ 64.8454]

LAUD(-2) -0.187915 0.051730

(0.03507) (0.01983)
[-5.35824] [ 2.60889]
 LAUD(-3) 0.003494 -0.012229
(0.03520) (0.01990)
[ 0.09924] [-0.61439]

LAUD(-4) -0.039199 0.065672

(0.03515) (0.01987)
[-1.11511] [ 3.30426]

LAUD(-5) 0.011042 -0.072226

(0.03516) (0.01988)
[ 0.31408] [-3.63360]

LAUD(-6) -0.025292 -0.007812

(0.03520) (0.01990)
[-0.71854] [-0.39254]

LAUD(-7) -0.019773 0.071371

(0.03516) (0.01988)
[-0.56241] [ 3.59054]

LAUD(-8) 0.045320 -0.037162

(0.02582) (0.01460)
[ 1.75553] [-2.54601]

C 0.000219 1.44E-05
(0.00186) (0.00105)
[ 0.11811] [ 0.01376]

R-squared 0.999228 0.998248

Adj. R-squared 0.999226 0.998242
Sum sq. resids 1.001960 0.320292
S.E. equation 0.014452 0.008171
F-statistic 388104.9 170840.2
Log likelihood 13574.15 16319.29
Akaike AIC -5.632386 -6.772865
Schwarz SC -5.609505 -6.749984
Mean dependent 3.394889 -0.257707
S.D. dependent 0.519320 0.194902

Determinant resid covariance (dof adj.) 1.38E-08

Determinant resid covariance 1.37E-08
Log likelihood 29917.15
Akaike information criterion -12.41510
Schwarz criterion -12.36934

Vector Autoregression Estimates

Date: 08/16/19 Time: 20:17
Sample (adjusted): 8/22/2000 8/08/2019
Included observations: 4813 after adjustments
Standard errors in ( ) & t-statistics in [ ]

D(LAUX) D(LAUD)
D(LAUX(-1)) -0.042838 -0.003632
(0.01451) (0.00820)
[-2.95204] [-0.44270]

D(LAUX(-2)) -0.047184 0.009913

(0.01451) (0.00820)
[-3.25194] [ 1.20831]

D(LAUX(-3)) 0.012770 -0.001140

(0.01454) (0.00822)
[ 0.87852] [-0.13876]

D(LAUX(-4)) -0.015393 0.000169

(0.01454) (0.00822)
[-1.05877] [ 0.02055]

D(LAUX(-5)) 0.016295 -0.003289

(0.01454) (0.00822)
[ 1.12089] [-0.40015]

D(LAUX(-6)) -0.006267 -0.000446

(0.01453) (0.00822)
[-0.43119] [-0.05425]

D(LAUX(-7)) -0.004061 0.011995

(0.01452) (0.00821)
[-0.27973] [ 1.46114]

D(LAUX(-8)) 0.011161 -0.009996

(0.01439) (0.00813)
[ 0.77577] [-1.22876]

D(LAUD(-1)) 0.211147 -0.059663

(0.02566) (0.01451)
[ 8.22886] [-4.11231]

D(LAUD(-2)) 0.023919 -0.007643

(0.02588) (0.01463)
[ 0.92433] [-0.52237]

D(LAUD(-3)) 0.028105 -0.019989

(0.02587) (0.01463)
[ 1.08648] [-1.36660]

D(LAUD(-4)) -0.011793 0.045190

(0.02586) (0.01462)
[-0.45603] [ 3.09046]

D(LAUD(-5)) -0.000561 -0.026485

(0.02586) (0.01462)
[-0.02171] [-1.81124]

D(LAUD(-6)) -0.026565 -0.034273

(0.02586) (0.01462)
[-1.02705] [-2.34352]
 D(LAUD(-7)) -0.045488 0.037473
(0.02587) (0.01463)
[-1.75808] [ 2.56143]

D(LAUD(-8)) 0.000691 0.008094

(0.02583) (0.01461)
[ 0.02676] [ 0.55413]

C 0.000444 2.97E-05
(0.00021) (0.00012)
[ 2.12234] [ 0.25101]

R-squared 0.019438 0.011332

Adj. R-squared 0.016167 0.008034
Sum sq. resids 1.001937 0.320325
S.E. equation 0.014454 0.008173
F-statistic 5.942193 3.435645
Log likelihood 13570.89 16315.15
Akaike AIC -5.632199 -6.772552
Schwarz SC -5.609315 -6.749667
Mean dependent 0.000417 2.96E-05
S.D. dependent 0.014572 0.008206

Determinant resid covariance (dof adj.) 1.38E-08

Determinant resid covariance 1.37E-08
Log likelihood 29909.94
Akaike information criterion -12.41469
Schwarz criterion -12.36892

Varian
ce
Decom
position
of
D(LAU
X):
Period S.E. D(LAUX) D(LAUD)

1 0.014454 100.0000 0.000000

2 0.014562 98.60970 1.390297
3 0.014577 98.61243 1.387565
4 0.014581 98.60551 1.394494
5 0.014583 98.59868 1.401322
6 0.014585 98.59786 1.402137
7 0.014588 98.57320 1.426796
8 0.014594 98.49472 1.505276
9 0.014596 98.48992 1.510084
10 0.014596 98.48868 1.511323

Varian
ce
Decom
position
 of
D(LAU
D):
Period S.E. D(LAUX) D(LAUD)

1 0.008173 0.988566 99.01143

2 0.008188 1.000156 98.99984
3 0.008189 1.031053 98.96895
4 0.008190 1.033433 98.96657
5 0.008199 1.033027 98.96697
6 0.008204 1.040066 98.95993
7 0.008208 1.039747 98.96025
8 0.008217 1.101661 98.89834
9 0.008219 1.139890 98.86011
10 0.008219 1.139901 98.86010

Choles
ky
Orderin
g:
D(LAU
X)
D(LAU
D)