Question: Use INTQRT for this exercise. (i) In Example 18.7, we estimated an error correction model for the holding yield on six-month T-bills, where one lag

Use INTQRT for this exercise.

(i) In Example 18.7, we estimated an error correction model for the holding yield on six-month T-bills, where one lag of the holding yield on three-month T-bills is the explanatory variable. We assumed that the cointegration parameter was one in the equation hy6t 5 a 1 bhy3t21 1 ut

Now, add the lead change, Dhy3t

, the contemporaneous change, Dhy3t21, and the lagged change, Dhy3t22, of hy3t21. That is, estimate the equation hy6t 5 a 1 bhy3t21 1 f0Dhy3t 1 f1Dhy3t21 1 r1Dhy3t22 1 et and report the results in equation form. Test H0: b 5 1 against a two-sided alternative. Assume that the lead and lag are sufficient so that 5hy3t216 is strictly exogenous in this equation and do not worry about serial correlation.

(ii) To the error correction model in (18.39), add Dhy3t22 and 1hy6t22 2 hy3t23 2. Are these terms jointly significant? What do you conclude about the appropriate error correction model?

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