I(2) Cointegration Procedure and Paper

Clara Jorgensen of the University of Copenhagen has written a new procedure that adds support for I(2) models to the current version of the CATS cointegration package. Her work has the full support of the authors of CATS, and Clara has graciously made this procedure available to all CATS users free of charge. You can download the files from this Web site (see below) or from our dial-up BBS. Please note that you must have RATS Version 4.20 or later and a copy of CATS to make use of this I(2) procedure. We can only provide a limited amount of support for this procedure. Most technical questions will have to be addressed to Ms. Jorgensen.

New: Clara recently sent us a copy of her paper "Trend-Stationarity in the I(2) Cointegration Model", written with Hans Kongsted and Anders Rahbek. The file is available for downloading in the form of a PK-Zipped PostScript file. Just click on I2PAPER.ZIP (161,111 bytes).

Downloading the Procedure

To get the procedure, just download and un-zip the file I2.ZIP.

With most browsers, you can download the file by either clicking or shift+clicking on the filename, or right-clicking on the filename and choosing "Save As..." from the pop-up menu. See downloading files for additional tips. This file has been compressed using PK-Zip, and can be unzipped with PKUNZIP or a compatible utility. PC users who want a copy of PKUNZIP should download the self-extracting archive file PKZ204G.EXE. UNIX users who don't have a PKUNZIP-compatible utility should contact Estima for assistance.

Using the Procedure

The following information is taken from the "READ.ME" file that is included in the I2.ZIP file. For more information on I(2) cointegration, we recommend that you consult the papers cited below.

What the Procedures Do:

The I(2)-program computes the I(2) tests described in:

Paolo Paruolo: On the Determination of Integration Indices in I(2) Systems. Journal of Econometrics, 72, 1996, 313-357.
Clara Jorgensen, H. C. Kongsted and Anders Rahbek: Trend-stationarity in the I(2) model. Unpublished manuscript, University of Copenhagen.

And estimates the long run parameters in the cointegrated VAR-model using the two-step procedure described in:

Soren Johansen: A Statistical Analysis of Cointegration for I(2) variabeles, Econometric Theory, II, 1995, 25-59.

How to Get the Procedures:

You need to download the file I2.ZIP and unzip it. This produces the files CATSI2.SRC, EMPMENU.SRC, CATS_I2.SRC and CATRUNI2.SRC. Put them in the directory where your other CATS files are located. You must edit your CATSMAIN.SRC file so that it reads in the file CATSI2.SRC instead of CATS.SRC, i.e. CATSI2.SRC substitutes CATS.SRC.

How to Run the Procedures:

The I2 procedures add a new choice (I2) for the PROC option (you can still use PROC=RANK/TSPROP/I1 as well). To use the I2 procedures, write a CATS "set-up" program as usual, but use the option PROC=I2. An additional option called QTR is also available. QTR=1 allows for quadratic trends in data, QTR=0 does not allow for quadratic trends in data.

Example:

  open data c:\demoi2.dat
  data  63:1 89:2 lm lp linc rstar
  sou c:\rats420\cats\catsmain.src
  @CATS(lags=5,dettrend=CIDRift,qtr=0,seasON=0,norec,PROC=i2) 63:2 89:2
  # LM LP LINC RSTAR

The program calculates the I(2) tests for you. You must then choose the rank of the PI-matrix using the first item on the CATS menu.

The second step of the I(2) analysis can NOT be run with PI having full rank.

The file DEMOI2.PRG gives an example of how to write a CATS I(2)-program. Data for DEMOI2.PRG is in DEMOI2.DAT

Good Luck,
Clara Jorgensen
cmdj@bgbank.dk

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