Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 13

Use INTQRT.RAW for this exercise.

(i) In Example 18.7, we estimated an error correction model for the holding yield on six-month T-bills, where one lag of the holding yield on three-month T-bills is the explanatory variable. We assumed that the cointegration parameter was one in the equation hy6t = ? + ?hy3t-1 + ut. Now, add the lead change, ?hy3t-2, the contemporaneous change, ?hy3t-1, and the lagged change, ?hy3t-2, of hy3t- 1. That is, estimate the equation

and report the results in equation form. Test H0: ? = 1 against a two-sided alternative. Assume that the lead and lag are sufficient so that {hy3t-1} is strictly exogenous in this equation and do not worry about serial correlation.

(ii) To the error correction model in, add ?hy3t-2 and (hy6t-2 - hy3t-3). Are these terms jointly significant? What do you conclude about the appropriate error correction model?

Equation