Self-Generating Variables in a Cointegrated VAR Framework

UCSD Economics Discussion Paper No. 2001-04

Posted: 25 Jul 2001

See all articles by Clive W. J. Granger

Clive W. J. Granger

University of California, San Diego (UCSD) - Department of Economics; Tinbergen Institute

Gawon Yoon

Kookmin University; Pusan National University

Date Written: February 2001

Abstract

A variable is defined to be self-generating if it can be forecast efficiently from its own past only. Conditions are derived for certain linear combinations to be self-generating in error correction models. Interestingly, there are only two candidates for self-generation in an error correction model. They are cointegrating relationships and common stochastic trends defined by Gonzalo and Granger (1995). The usefulness of self-generation as a multivariate-modelling tool is investigated. A simple testing procedure is also presented. Some interesting economic hypothesis can be easily tested in the self-generation framework. For example, for forward exchange rate to have forecasting power for the future movements in spot rate, the latter should not be self-generating. Given that they are cointegrated, the spot exchange rate should not be a common stochastic trend, which can be easily tested. We also provide additional examples.

Keywords: Self-Generation, Cointegrated VAR, Common Stochastic Trends, Aggregation of Time Series, Efficiency of Forecasting

JEL Classification: C22, C32

Suggested Citation

Granger, Clive W. J. and Yoon, Gawon, Self-Generating Variables in a Cointegrated VAR Framework (February 2001). UCSD Economics Discussion Paper No. 2001-04, Available at SSRN: https://ssrn.com/abstract=266521

Clive W. J. Granger

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-3383 (Phone)
858-534-7040 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Gawon Yoon (Contact Author)

Kookmin University ( email )

Chongnung-dong, Songbuk-gu
Seoul, 136-702
Korea, Republic of (South Korea)

Pusan National University ( email )

mulgeumup beomyeli
Kumjungku, Pusan 609-735, 50612
Korea, Republic of (South Korea)

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