I mean ADF test. Because the thing is ,when you regress S1 ~ S2 using OLS you almost for sure turned the residual series stationary, because the criteria for minimizing the sum of square residuals is to set them equal to zero. So You should perform a CRADF (co-integrated residuals - ADF) (see the link)Other things that you have to be aware is that in case you choose an equation with deterministic variables (constants , trends ) and they arent significant, your test power gets lower and its something to worry, once they arent high. But in the case that deterministc terms are relevant and you omit them, your test power goes to zero. You also should be careful performing a Engle-Granger test, because once you set the regression, you implicitly choose a cause-effect relationship. So first think of the economic relationship that your variables might have and them set your equation. In the VEC you also have short-term deviations from equilibrium, not only the cointegration relationship that is "looking" to the long-run. IMHO you should do the johansen methodology. Mackinnon
Last edited by Dantas
on January 24th, 2012, 11:00 pm, edited 1 time in total.