CEE 4221 Study Guide - Quiz Guide: Ftse 100 Index, Spot Contract

• School: Temple University
• Department: Civil Engineering
• Course: CEE 4221
• Professor: Brooks

Document Summary

There are (at least) 3 methods we could use: engle granger, engle and yoo, and. This is a single equation technique which is conducted as follows: Make sure that all the individual variables are i(1). Then estimate the cointegrating regression using ols. Save the residuals of the cointegrating regression, . Test these residuals to ensure that they are i(0). Use the step 1 residuals as one variable in the error correction model e. g. yt = 1 xt + 2( ) + ut where = yt-1- xt-1. An example of a model for non-stationary variables: lead-lag relationships between spot and futures prices. We expect changes in the spot price of a financial asset and its corresponding futures price to be perfectly contemporaneously correlated and not to be cross-autocorrelated. i. e. expect corr( ln(ft), ln(st)) 1. We can test this idea by modelling the lead-lag relationship between the two. We will consider two papers tse(1995) and brooks et al (2001).