Johansen test

Generic
1

hello everyone, I'm just trying to check whether I understand correctly the Johansen test



there are 2 statistics produced: 

  • trace and 
  • eigenvalue



    for trace, the null-hypothesis H_0 is: trace <= 0? so in the video we have rejected the null-hypothesis and therefore the trace is greater than zero with 95% confidence



    I still don't understand the test for e-values, and how it's a measure of. co-integration



    thanks
2

Hi Alex,

To reject a null hypothesis at 95% confidence, the trace must exceed the critical value at 5% (or 95%, depending on how it is defined.)



Eigenvalue is similar: the bigger it is, the more confident we can reject the null hypothesis. Each eigenvalue is proportional to the 1/halfife of the mean reversion of a cointegrating vector (portfolio).

Ernie