0
$\begingroup$

I'm currently trying to estimate a VAR with 3 variables - consumption, investment and a credit spread. I have inspected the variables and run ADF tests to determine that they are in-fact trend-stationary rather than processes with a unit root. On running a Johansen test to check if they cointegrate, I find that the LR equilibrium matrix has a rank of 1. I have 2 questions:

  1. Does it make sense to run a cointegration test on trend stationary variables?
  2. In order to estimate the VAR, should I detrend the variables and use the detrended data in my estimation?

Any help would be much appreciated!

Improve this question
$\endgroup$
2
  • $\begingroup$ Apologies, I didn't know I was meant to do that, thank you very much for the help! $\endgroup$
    – user354621
    Commented May 14, 2022 at 13:36
  • $\begingroup$ No problem, you are welcome! $\endgroup$
    – Richard Hardy
    Commented May 14, 2022 at 13:56

1 Answer 1

Reset to default
0
$\begingroup$
  1. No, it does not make sense to run a cointegration test on trend stationary variables. Cointegration requires variables with unit roots.
  2. You can either detrend the variables beforehand or include a trend in the VAR model as an exogenous regressor.
Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.