You Have Collected Time Series for Various Macroeconomic Variables to Test

question 39

Essay

You have collected time series for various macroeconomic variables to test if there is a single cointegrating relationship among multiple variables. Formulate the null hypothesis and compare the EG-ADF statistic to its critical value.
(a)Canadian unemployment rate, Canadian Inflation Rate, United States unemployment rate, United States inflation rate; t = (-3.374).
(b)Approval of United States presidents (Gallup poll), cyclical unemployment rate, inflation rate, Michigan Index of Consumer Sentiment; t = (-3.837).
(c)The log of real GDP, log of real government expenditures, log of real money supply (M2); t = (-2.23).
(d)Briefly explain how you could potentially improve on VAR(p)forecasts by using a cointegrating vector.

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Definitions:

Unsystematic Risk

The risk associated with individual assets, such as a company's stock, that can be mitigated through diversification.

Beta

A standard for evaluating the unpredictability, or fundamental risk, of a security or diversified portfolio in contrast with the entire market.

Non-diversifiable Risk

The portion of risk that can't be eliminated through diversification, often related to systemic factors affecting all investments.

Standard Deviation

A statistical measure that quantifies the amount of variation or dispersion of a set of data values.