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Quantitative Finance · Glossary

What is Engle–Granger test?

Also known as: Engle--Granger test

Definition 20.7 Quantitative Methods · Chapter 20 — Multivariate Series and Cointegration

The Engle–Granger test regresses one variable on the others in levels and applies a Dickey–Fuller test to the residuals, with critical values that account for the estimated coefficients.

Null distributions of the Dickey–Fuller statistic for one random walk and for the least-squares residual of one random walk regressed on two others, from 4 000 simulated samples of 1 000 days; the dashed lines are their 5% points, -2.92 and -3.75. Data: the chapter’s tutorial, seeded.
Figure 20.2. Null distributions of the Dickey–Fuller statistic for one random walk and for the least-squares residual of one random walk regressed on two others, from 4 000 simulated samples of 1 000 days; the dashed lines are their 5% points, −2.92-2.92 and −3.75-3.75. Data: the chapter’s tutorial, seeded.
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