MANAGEMENT DEVELOPMENT INSTITUTE

AMAF Project
Cointegration Test

Submitted To
Prof. Sajal Ghosh

Submitted By:
Mohammad Hasan 13P087
Monika Khetan
13P088
Nitin Dangwal
13P094

1 | Page

Data Explanation
Through the following analysis we want to see whether there is a long term
relationship between the Stock Prices of Two major steel companies in India
1. Tata Steel (with captive mines)
2. Jindal Steels (imported coal)
With the imported coal prices (Australian in the case of India) & Iron Ore
Prices
Basically we want to see how the prices of steel & iron ore effects the stock
prices of two types of steel companies in India. The two types being one with
the captive mines & the other without the mines.
We believe that the above prices along with the stock prices of the two
companies should be closely related in the long term.
The time series used in the analysis are as follows

Stock prices Tata Steel

Stock Prices Jindal Steel
Australian coal prices
Iron ore prices

Steps for Cointegration Test

1. Since we are dealing with the time series data, the first thing we
should check is that whether the series are stationary are not (ADF
Test). In this step we will individually check for the unit root in each of
the series. If unit root exists we would check whether all the series are
I(1) or not.

Coal

Null Hypothesis: COAL has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 2 (Automatic based on SIC, MAXLAG=12)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-2.557512
-4.051450
-3.454919
-3.153171

0.3006

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(COAL) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=12)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-7.697356
-3.495677
-2.890037
-2.582041

0.0000

t-Statistic

Prob.*

-0.442540
-4.049586
-3.454032
-3.152652

0.9847

t-Statistic

Prob.*

-8.226039
-3.495677
-2.890037
-2.582041

0.0000

t-Statistic

Prob.*

-2.176050
-4.049586
-3.454032
-3.152652

0.4974

*MacKinnon (1996) one-sided p-values.

Iron Ore

Null Hypothesis: IRON_ORE has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=12)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: D(IRON_ORE) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=12)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level
*MacKinnon (1996) one-sided p-values.

JSW

Null Hypothesis: JSW has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=12)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(JSW) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=12)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-10.44987
-3.495677
-2.890037
-2.582041

0.0000

t-Statistic

Prob.*

-2.509986
-4.049586
-3.454032
-3.152652

0.3229

t-Statistic

Prob.*

-10.01634
-3.495677
-2.890037
-2.582041

0.0000

*MacKinnon (1996) one-sided p-values.

Tata Steel

Null Hypothesis: TATA has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=12)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level
*MacKinnon (1996) one-sided p-values.
Null Hypothesis: D(TATA) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=12)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level
*MacKinnon (1996) one-sided p-values.

We find all the series are I(1) in nature

2. As all the series are I(1) types, we can go for cointegration test. Before
doing cointeration test, we would check the lag structure
We found that the lag structure is 1

3. Now as we have the lag structure we will go for Cointegration test

Date: 11/07/14 Time: 00:54
Sample (adjusted): 3 104
Included observations: 102 after adjustments
Trend assumption: Linear deterministic trend
Series: TATA JSW COAL IRON_ORE
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
No. of CE(s)

Eigenvalue

Trace
Statistic

0.05
Critical Value

Prob.**

None *
At most 1 *
At most 2
At most 3

0.210943
0.194780
0.056397
0.017444

53.97882
29.81325
7.716059
1.794959

47.85613
29.79707
15.49471
3.841466

0.0119
0.0498
0.4962
0.1803

Trace test indicates 2 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
No. of CE(s)

Eigenvalue

Max-Eigen
Statistic

0.05
Critical Value

Prob.**

None
At most 1 *
At most 2
At most 3

0.210943
0.194780
0.056397
0.017444

24.16557
22.09719
5.921100
1.794959

27.58434
21.13162
14.26460
3.841466

0.1291
0.0365
0.6234
0.1803

Max-eigenvalue test indicates no cointegration at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

From above we find Trace test indicates two cointegrating relationship exists.
However Eigen Value test we get that no cointegration exists.
But as Trace shows cointegration we will test the series for cointegration
relationship.

4. Now as cointegration relationship exists, applying the Vector Error

Correction Model
Error Correction:

D(TATA)

D(JSW)

D(COAL)

D(IRON_ORE)

CointEq1

0.086092
(0.02826)
[ 3.04692]

0.131443
(0.04569)
[ 2.87657]

0.014376
(0.00339)
[ 4.23641]

-0.002028
(0.00381)
[-0.53229]

D(TATA(-1))

0.068154
(0.15378)
[ 0.44319]

0.355271
(0.24870)
[ 1.42853]

-0.005263
(0.01847)
[-0.28497]

0.031851
(0.02073)
[ 1.53638]

D(JSW(-1))

-0.159193
(0.09292)
[-1.71325]

-0.335635
(0.15027)
[-2.23358]

-0.001122
(0.01116)
[-0.10051]

0.005461
(0.01253)
[ 0.43601]

D(COAL(-1))

-0.551174
(0.75687)
[-0.72822]

-1.184119
(1.22402)
[-0.96740]

0.167968
(0.09090)
[ 1.84785]

0.012260
(0.10203)
[ 0.12016]

D(IRON_ORE(-1))

-0.010661
(0.74787)
[-0.01426]

-0.320294
(1.20946)
[-0.26482]

0.189343
(0.08982)
[ 2.10808]

0.218269
(0.10082)
[ 2.16497]

1.468557
(6.88932)
[ 0.21316]

13.45015
(11.1414)
[ 1.20722]

0.038437
(0.82739)
[ 0.04646]

0.267996
(0.92873)
[ 0.28856]

From the above Result we can conclude that

There is a long run causality running from all the variables to Tata
steel, JSW and Coal.
However in the case of iron ore no such causality exists.
5. Checking the Granger Causality (short term causality)
VEC Granger Causality/Block Exogeneity Wald Tests
Date: 11/07/14 Time: 00:59
Sample: 1 104
Included observations: 102

Dependent variable: D(TATA)

Excluded

Chi-sq

df

Prob.

D(JSW)
D(COAL)
D(IRON_ORE)

2.935211
0.530308
0.000203

1
1
1

0.0867
0.4665
0.9886

All

3.418829

0.3314

Dependent variable: D(JSW)

Excluded

Chi-sq

df

Prob.

D(TATA)
D(COAL)
D(IRON_ORE)

2.040712
0.935871
0.070132

1
1
1

0.1531
0.3333
0.7911

All

2.873105

0.4116

Dependent variable: D(COAL)

Excluded

Chi-sq

df

Prob.

D(TATA)
D(JSW)
D(IRON_ORE)

0.081207
0.010102
4.443991

1
1
1

0.7757
0.9199
0.0350

All

5.323567

0.1496

Dependent variable: D(IRON_ORE)

Excluded

Chi-sq

df

Prob.

D(TATA)
D(JSW)
D(COAL)

2.360469
0.190101
0.014439

1
1
1

0.1244
0.6628
0.9044

All

7.094540

0.0689

In short term we find only one relation i.e short term causality running from
Iron ore to coal.