ECON 3350/7350: Applied Econometrics for Macroeconomics and Finance
Tutorial 11: VEC Models
The data file term structure.csv contains data of a system of four Australian in- terest rates: the 5 year (i5y) and 3 year (i3y) Treasury Bond (capital market) rates, along with the 180 day (i180d) and 90 (i90d) day Bank Accepted Bill (money market) rates. The data are annualized monthly rates for the period June 1992 to August 2010 (T = 219).
(a) Consider the system of four rates as a VAR system. Test for the appropriate lag length.
(b) Using the chosen lag length, test for the cointegration rank and most suitable VECM specification. Note that Stata implements a method called the Johansen test for this purpose. Given the outcome of the test, choose the appropriate model to continue the analysis. What is the cointegration rank r?
(c) Given r, fit the VECM to the data using the following identifying restrictions: i90dt
1β12 −1β14i3y t,
0 1 β23 β24 i180dt i5yt
and plot the cointegrating vectors.
(e) Produce impulse response functions based on the VECM. Comment on your findings.
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