Jamaica and Trinidad and Tobago Treasury Bill Rates
ECON3050 – Econometrics II
In-course Project
Table of Contents
Introduction 3
Literature Review 4
Analysis 5
Conclusion 8
Appendix 9
Introduction
The purpose of this project is to investigate the co-movements of Jamaica and Trinidad and Tobago Treasury bill rates, as well as to investigate whether the US Treasury bill rate Granger Cause the movement of the Treasury bill rates of both Caribbean islands. To study the co-movements between the Treasury rates, we will determine if there is a long run relationship between the two series using co-integration tests. Direct Granger tests will be used to determine the causality between them. Watson and Teelucksingh (2002) said that the co-integration of two variables occurs when the linear combination of the two does not vary. This means that they tend to move together in the long run. It also described Granger causality as follows, “(A variable) x is a granger cause of (another variable) y, if present y can be predicted with better accuracy by using past values of x rather than by not doing so, ceteris paribus.”
Literature review
In testing for co-integration, I will be using the Johansen Procedure. Watson and Teelucksingh (2002) describe it as a maximum likelihood approach, based on the factorization Γ=αβ’, and is used for determining the maximum number of co-integrating vectors, (in this case, it would be one since there are only two variables) and obtaining the maximum likelihood estimators of the co-integrating matrix (β) and adjustment parameters (α). If co-integration is established, the error correction model (ECM) is estimated.
The two series, however, must be of the same integrating order, namely I(1), before we can test for co-integration. There are three formal tests to determine integrating order; The Dickie-Fuller (DF) test, the Augmented Dickie-Fuller (ADF) test and the Phillips-Perron test. Watson and Teelucksingh (2002) states the
In-course Project
Table of Contents
Introduction 3
Literature Review 4
Analysis 5
Conclusion 8
Appendix 9
Introduction
The purpose of this project is to investigate the co-movements of Jamaica and Trinidad and Tobago Treasury bill rates, as well as to investigate whether the US Treasury bill rate Granger Cause the movement of the Treasury bill rates of both Caribbean islands. To study the co-movements between the Treasury rates, we will determine if there is a long run relationship between the two series using co-integration tests. Direct Granger tests will be used to determine the causality between them. Watson and Teelucksingh (2002) said that the co-integration of two variables occurs when the linear combination of the two does not vary. This means that they tend to move together in the long run. It also described Granger causality as follows, “(A variable) x is a granger cause of (another variable) y, if present y can be predicted with better accuracy by using past values of x rather than by not doing so, ceteris paribus.”
Literature review
In testing for co-integration, I will be using the Johansen Procedure. Watson and Teelucksingh (2002) describe it as a maximum likelihood approach, based on the factorization Γ=αβ’, and is used for determining the maximum number of co-integrating vectors, (in this case, it would be one since there are only two variables) and obtaining the maximum likelihood estimators of the co-integrating matrix (β) and adjustment parameters (α). If co-integration is established, the error correction model (ECM) is estimated.
The two series, however, must be of the same integrating order, namely I(1), before we can test for co-integration. There are three formal tests to determine integrating order; The Dickie-Fuller (DF) test, the Augmented Dickie-Fuller (ADF) test and the Phillips-Perron test. Watson and Teelucksingh (2002) states the