Abstract
This paper examines the behavior of forecasts made from a co-integrated system as introduced by Granger (1981), Granger and Weiss (1983) and Engle and Granger (1987). It is established that a multi-step forecast will satisfy the co-integrating relation exactly and that this particular linear combination of forecasts will have a finite limiting forecast error variance. A simulation study compares the multi-step forecast accuracy of unrestricted vector autoregression with the two-step estimation of the vector autoregression imposing the co-integration restriction.
To test whether a system exhibits co-integration, the procedures introduced in Engle and Granger (1987) are extended to allow different sample sizes and numbers of variables.
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