Carbon prices – Cointegration – Engle Granger procedure
SUBMISSION DEADLINE: 07/03/2017, 5pm
Word limit: 1000 words (excluding tables).Please include word count.
1. Download dataset “Assignment.wf1″ from MyAberdeen. The workfile
contains two time series: the logs of two carbon price series. LEUA is the
log of the price for a pollution permit traded in the European Union
Emission Trading Scheme; LCER is the log ofa so-called Certified
Emission Reduction permit. The data is at daily frequency and the period
of observation is 01/06/2007-30/12/201 1. This assignment deals with
testing if the two series are cointegrated.
2. Describe the Engle Granger cointegration test.
3. Use the full sample first. Perform the Engle Granger cointegration test
implemented in EViews. Write a short summary of your results and
include the original EViews output.
4. Perform, for the full sample, the individual steps of the Engle Granger
procedure (see e.g. the textbook by Walter Enders, page 335, Step 1 and
Step 2, or Lecture 3, Slide 35, Step 1.).1 Write a short summary of your
results and include original EViews outputs. Compare the results to those
of question 3.
5. Now consider the shorter subsample 01/06/2007-30/06/2010. Redo
question 3 and 4. Use a significance level of 10%. Discuss your results.
1. 1 Hint: residuals from a regression can be calculated using the Proc menu
in the Equation object, “Make Residual Series” command. Please note that
you do not need to estimate the error correction model.
