Cointegration analysis and the choice of lag length

Abstract

This article investigates the effects of the choice of lag length on the estimation of long run cointegration relationships using the Johansen estimation procedure. This issue is of particular interest to applied researchers using time series data, see for example Awokuse (2005), Bacchiocchi et al . (2005), Gallegati (2005), Gomes and Paz (2005), Hasan (2005) and Pieroni and Ricciarelli (2005), among many others. An empirical example is used to demonstrate some of the issues that applied researchers face when they wish to use cointegration analysis. First, the number of lags to include in the model must be determined. However, different lag length selection criteria often lead to a different conclusion regarding the optimal lag order that should be used. Second, as demonstrated in this article, the choice of lag length can drastically affect the results of the cointegration analysis.