[R-SIG-Finance] Regarding significance of "Season" parameter

[gunjan narulkar]

Hi,

I'm trying to learn about cointegration, specifically about how to use "ca.jo" for finding the cointegration basis. The data is that of FX rates and M1 supply difference. I need help understanding the below two points:

1. Seasonal variables: 

-> What is the importance of season parameter apart from seemingly obvious explanation in the documentation; in other words, should it be understood as equivalent of Seasonal ARIMA vs ARIMA where we take care of the seasonal unit roots? 

-> Should the parameter be set to the value at which the Y_t under question is sampled? Or should it be based on some common frequency derived from individual Y_t component series's periodicity as found from their periodogram (spectrum command in R)?

-> Should the season paramater must be greater then 2? As by spectrum of M1 and FX rate series, I was getting the prominent frequencies for both variables as 2 and its multiples, but got below error, which got resolved as soon as I used anything >2:

"Error in while (nrow(dums) < N) { : argument is of length zero"

Background: I tried checking for cointegration between two monthly series, taking the "season" parameter as 12 (as I had monthly data) first time and without having any season parameter the second. The order of cointegration in both the cases was 1. But further, when I tried fitting VECM and using vec2var created 6 months ahead forecasts and calculated MAPE (Mean Absolute Percentage Error), the MAPE for ca.jo output without season parm specified was better then with season parameter - which lead me to the above confusions.


2. ecdet paramter: 
The awesome book as well as documentation describe this parameter nicely. But when I use it, the message that comes in the output is a bit confusing:

> cv1.m1.bop = ca.jo(cor2,type="trace",ecdet="const",K=2,season=12,dumvar=bop)
> summary(cv1.m1.bop) 


###################### 
# Johansen-Procedure # 
###################### 

Test type: trace statistic , without linear trend and constant in cointegration 
.
.
.

The confusion is that I'm interested in finding out presence of "restricted constant", so I used "ecdet='const'". Am I correct in doing so?

Apologies if this is not the right forum for asking these questions and also for the long mail.

Thanks & Regards,

Gunjan Narulkar,
Ist Year M. Mgmt., DOMS,
Indian Institute of Science
Contact: +91-99007-40404
LinkedIn: in.linkedin.com/pub/gunjan-narulkar/19/a3b/521