Stationarity and cointegration tests: Comparison of Engle - Granger and Johansen methodologies

Bilgili, Faik (1998): Stationarity and cointegration tests: Comparison of Engle - Granger and Johansen methodologies. Published in: Journal of Faculty of Economics and Administrative Sciences, Erciyes University No. 13 (1998): pp. 131-141.

Abstract

Engle-Granger methodology follows two-step estimations. The first step generates the residuals and the second step employs generated residuals to estimate a regression of first-differenced residuals on lagged residuals. Hence, any possible error from the first step will be carried into second step. The Johansen maximum likelihood methodology circumvents Engle-Granger methodology by estimating and testing for the presence of multiple cointegrating vectors through largest canonical correlations. The number of non-zero eigenvalues of Ψ of eq. 26 in the text will specify the number of cointegrating vectors. Some Monte Carlo evidence explores that Johansen procedure performs better than both single equation methods and alternative multivariate methods. In fact, evidence of this paper reveals, as well, that, as Engle-Granger yields some inconclusive outcome, the Johansen tests reach at least one cointegration relationship among variables for Canada, India, Italy, Japan, Turkey and the USA. Then, one may claim that Johansen methodology dominates the Engle- Granger methodology in cointegration analyses.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stationarity, Cointegration, Engle-Granger methodology, Johansen methodology, Consumption
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C18 - Methodological Issues: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C29 - Other; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

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