Review 2B

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Review 2B#

by Professor Throckmorton
for Time Series Econometrics
W&M ECON 408/PUBP 616

The value of homes and rent might be cointegrated. If rent is above equilibrium, then home ownership is more appealing, which should drive rent down and home prices up, i.e., restoring a long-run equilibrium relationship. Was that true in the lead up to the 2007-2009 Great Recession?

1)#

  • Read data on home prices (FRED: CSUSHPINSA) and rental prices (FRED: CUUR0000SEHA)

  • Put the data in a dataframe and reindex the data to month end.

  • Display the head and tail of the dataframe in a table (not a plot).

2)#

  • Transform the data with \(100\times \log\).

  • Remove seasonality as needed.

  • Conduct ADF unit root tests to verify that series are I(\(1\)) from 1990-2006.

3)#

  • What is the lag order for a VECM selectd by AIC? Make sure maxlags is not constraining the result.

  • Conduct a Johansen cointegration test for the lag order. Set det_order=-1.

4)#

  • Estimate a VECM given your answers to the previous questions.

  • For which variable is the weight on the error correction term significant? Interpret that result.

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