Identification example

• This continues on from the Johansen

demonstration
• Under standard finance theory the weekly
libor rate should cointegrate with the
monthly and the weekly should cointegrate
with the 3 month
• Implies 2 bivariate vectors
• Weekly = monthly
• Weekly = 3month

• So 6 restrictions (-1,1,0) and -1,0,1)

• We need 4 for identification so 2 over
identifying restrictions to test.
• This follows on from the last demo
• We have already tested cointegration
• Estimated the model subject to 2
cointegrating vectors
• Now we impose the restrictions
• First we will apply just identifying
restrictions
• Now we will apply and test the 2 over
identifying restrictions
Restricted
cointegrating vectors
TEST of restriction