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11 Roy Batchelor 2000 EVIEWSTutorial 1EVI EWS tutorial:Cointegration and error correctionProfessor Roy BatchelorCity University Business School, London& ESCP, Paris Roy Batchelor 2000 EVIEWSTutorial 2EVI EWSr On the City University system, EVIEWS 3.1 is inStart/ Programs/ Departmental Software/CUBSr Analysing stationarity in a single variable using VIEWr Analysing cointegration among a group of variablesr Estimating an ECM modelr Estimating a VAR-ECM model22 Roy Batchelor 2000 EVIEWSTutorial 3The FT500M workfile Roy Batchelor 2000 EVIEWSTutorial 4Data transformationr Generate a series for the natural log of the FT500 index (lft500)r Test for stationarity in the level of this series the first difference of this series (dlft500)r Results show that lft500 is an I(1) variable33 Roy Batchelor 2000 EVIEWSTutorial 5Generate ln(FT500) Roy Batchelor 2000 EVIEWSTutorial 6Augmented Dickey-Fuller (ADF) Test44 Roy Batchelor 2000 EVIEWSTutorial 7ADF results: levelThe hypothesis thatlft500 has a unit rootcannot be rejectedThe hypothesis thatlft500 has a unit rootcannot be rejected Roy Batchelor 2000 EVIEWSTutorial 8ADF test results: first differenceThe hypothesis thatthe first difference oflft500 has a unit rootcan be rejected.So lft500 is I(1)The hypothesis thatthe first difference oflft500 has a unit rootcan be rejected.So lft500 is I(1)55 Roy Batchelor 2000 EVIEWSTutorial 9Cointegration: two variablesr The variables lft500 (log of stock index) and ldiv (log ofdividends per share) are both I(1)r We can test whether they are cointegrated that is, whether a linear function of these is I(0) An example of a linear function islft500t = a0+a1ldivt+utwhen ut = might be I(0)r The expression in brackets is called the cointegrating vector,which has normalised coefficients Roy Batchelor 2000 EVIEWSTutorial 10Form new group.