A curve of yields or a basket of related securities can contain several independent long-run restrictions. Single-equation Engle--Granger finds at most one and forces an arbitrary normalisation. Johansen estimates the whole system as a VECM and tests the number of stationary combinations.
Learning objectives. By the end of this note you should be able to:
- interpret the rank of the VECM long-run matrix;
- state trace and maximum-eigenvalue rank tests;
- factor ;
- execute the sequential rank-selection workflow.
In this lesson
- Rank is the number of equilibria
- What to report
Before you start
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