NAME: J.

JEROM EMMANUAL
REG. NO: FGS/2016/MBUS/026
SUBJECT: FINANCIAL ECONOMETRICS
SUBJECT CODE: MBACC 52133

Assignment 1:

MASTER OF BUSINESS IN ACCOUNTING & FINANCE

FACULTY OF COMMERCE & MANAGEMENT STUDIES
DEPARTMENT OF ACCOUNTANCY
UNIVERSITY OF KELANIYA
Exercise I

1. Testing Stationarity of Consumer Sentiment Indicator

Time Plot

CSI
14

12

10

-2
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

According to the time plot of CSi, it can observe a slight positive trend up to 2014 and then a
sharp negative trend up to 2017. Therefore, the time series may not stationary.

Testing Unit Root

To test the unit root, two methods of augmented Dickey-Fuller test and Phillips-Perron test will
be used.

Hypothesis :

H0 : CSI has a unit root

H1 : CSI has not a unit root

Test 1 : Augmented Dickey-Fuller

Results of the above test is as follows,

At levels

Null Hypothesis: CSI has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -0.550772 0.9765

Test critical values: 1% level -4.211868
5% level -3.529758
10% level -3.196411

1
*MacKinnon (1996) one-sided p-values.

At first difference

Null Hypothesis: D(CSI) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -6.141456 0.0001

Test critical values: 1% level -4.219126
5% level -3.533083
10% level -3.198312

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

According to the ADF test, Ho has failed to reject at levels but Ho has rejected in first difference.
Therefore, it can be concluded that the CSI has stationary at first difference.

Test 2 : Phillips-Perron test

Null Hypothesis: CSI has a unit root

Exogenous: Constant, Linear Trend
Bandwidth: 4 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -0.249947 0.9894

Test critical values: 1% level -4.211868
5% level -3.529758
10% level -3.196411

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

Null Hypothesis: D(CSI) has a unit root

Exogenous: Constant, Linear Trend
Bandwidth: 4 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -6.134230 0.0001

Test critical values: 1% level -4.219126
5% level -3.533083
10% level -3.198312

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

According to the PP test, Ho has failed to reject at levels but Ho has rejected in first difference.
Therefore, it can be concluded that the CSI has stationary at first difference.

2
Correlogram

Results of the correlogram at levels and first difference are as bellow,

At levels

Date: 02/18/17 Time: 19:50

Sample: 2008Q1 2017Q4
Included observations: 40

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

. |***** | . |***** | 1 0.627 0.627 16.915 0.000

. |*** | .|. | 2 0.420 0.045 24.704 0.000
. |** | .|. | 3 0.313 0.055 29.139 0.000
. |** | . |*. | 4 0.284 0.096 32.898 0.000
. |*. | .|. | 5 0.203 -0.046 34.870 0.000
. |*. | .|. | 6 0.136 -0.017 35.781 0.000
. |*. | .|. | 7 0.122 0.043 36.533 0.000
. |*. | .|. | 8 0.119 0.022 37.271 0.000
.|. | **| . | 9 -0.025 -0.208 37.307 0.000
**| . | **| . | 10 -0.219 -0.255 39.981 0.000
**| . | .*| . | 11 -0.305 -0.118 45.359 0.000
**| . | .|. | 12 -0.285 -0.012 50.235 0.000
***| . | **| . | 13 -0.384 -0.231 59.393 0.000
***| . | .*| . | 14 -0.440 -0.121 71.918 0.000
***| . | .|. | 15 -0.378 0.041 81.519 0.000
**| . | .|. | 16 -0.318 -0.029 88.586 0.000
**| . | .|. | 17 -0.289 0.021 94.682 0.000
**| . | . |*. | 18 -0.262 0.086 99.933 0.000
.*| . | . |*. | 19 -0.191 0.084 102.84 0.000
.*| . | .*| . | 20 -0.156 -0.067 104.88 0.000

At first difference

Date: 02/18/17 Time: 19:50

Sample: 2008Q1 2017Q4
Included observations: 39

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

.|. | .|. | 1 -0.046 -0.046 0.0901 0.764

.|. | .|. | 2 -0.063 -0.066 0.2631 0.877
.*| . | .*| . | 3 -0.089 -0.096 0.6164 0.893
. |*. | . |*. | 4 0.157 0.145 1.7378 0.784
.*| . | .*| . | 5 -0.074 -0.074 1.9927 0.850
.|. | .|. | 6 -0.031 -0.026 2.0387 0.916
.|. | . |*. | 7 0.067 0.086 2.2607 0.944
. |*. | . |*. | 8 0.166 0.138 3.6777 0.885
.|. | . |*. | 9 0.054 0.096 3.8303 0.922
.|. | . |*. | 10 0.028 0.075 3.8729 0.953
.*| . | .*| . | 11 -0.081 -0.069 4.2505 0.962
.|. | .|. | 12 0.052 0.033 4.4106 0.975
.|. | .|. | 13 -0.004 0.003 4.4116 0.986
.*| . | .*| . | 14 -0.171 -0.201 6.2761 0.959

3
 .|. | .|. | 15 0.035 0.032 6.3576 0.973
.|. | .*| . | 16 0.015 -0.067 6.3738 0.984

By considering the probability values, it can be concluded CSI has stationary at its first levels.

2. Testing the stationarity by taking the first difference of CSI (dCSI)

Time Plot

DCSI
6

-2

-4

-6
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

According to the tile plot of dCSI, it can assume the time series data has stationary.

Testing Unit Root by ADF & PP tests

ADF test results

Null Hypothesis: DCSI has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -6.141456 0.0001

Test critical values: 1% level -4.219126
5% level -3.533083
10% level -3.198312

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

4
PP Test results

Null Hypothesis: DCSI has a unit root

Exogenous: Constant, Linear Trend
Bandwidth: 4 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -6.134230 0.0001

Test critical values: 1% level -4.219126
5% level -3.533083
10% level -3.198312

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

According to the both tests, it can be concluded that, first difference of CSI (dCSI) has
stationary.

Results of the correlogram at levels dCSI as bellow,

Date: 02/18/17 Time: 19:54

Sample: 2008Q1 2017Q4
Included observations: 39

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

.|. | .|. | 1 -0.046 -0.046 0.0901 0.764

.|. | .|. | 2 -0.063 -0.066 0.2631 0.877
.*| . | .*| . | 3 -0.089 -0.096 0.6164 0.893
. |*. | . |*. | 4 0.157 0.145 1.7378 0.784
.*| . | .*| . | 5 -0.074 -0.074 1.9927 0.850
.|. | .|. | 6 -0.031 -0.026 2.0387 0.916
.|. | . |*. | 7 0.067 0.086 2.2607 0.944
. |*. | . |*. | 8 0.166 0.138 3.6777 0.885
.|. | . |*. | 9 0.054 0.096 3.8303 0.922
.|. | . |*. | 10 0.028 0.075 3.8729 0.953
.*| . | .*| . | 11 -0.081 -0.069 4.2505 0.962
.|. | .|. | 12 0.052 0.033 4.4106 0.975
.|. | .|. | 13 -0.004 0.003 4.4116 0.986
.*| . | .*| . | 14 -0.171 -0.201 6.2761 0.959
.|. | .|. | 15 0.035 0.032 6.3576 0.973
.|. | .*| . | 16 0.015 -0.067 6.3738 0.984

According to the both tests, it can be concluded that, first difference of CSI (dCSI) has
stationary.

5
 3. Testing Stationarity of Industrial Production Index (IP)
Time Plot

IP
115

110

105

100

95

90

85
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

According to the above time plot, it can observe that, the is the positive trend in IP over the
years.

Testing Unit Root

To test the unit root, two methods of augmented Dickey-Fuller test and Phillips-Perron test will
be used.

Hypothesis :

H0 : IP has a unit root

H1 : IP has not a unit root

Test 1 : Augmented Dickey-Fuller

At levels
Null Hypothesis: IP has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 4 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -2.748428 0.2248

Test critical values: 1% level -4.243644

6
 5% level -3.544284
10% level -3.204699

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

At first difference

Null Hypothesis: D(IP) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 3 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.076580 0.1274

Test critical values: 1% level -4.243644
5% level -3.544284
10% level -3.204699

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

According to the ADF test, Ho has accepted at levels and first difference. Therefore, it can be
concluded that the IP has a unit root at levels and first difference.

Test 2 : Phillips-Perron test

Null Hypothesis: IP has a unit root

Exogenous: Constant, Linear Trend
Bandwidth: 5 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -7.247050 0.0000

Test critical values: 1% level -4.211868
5% level -3.529758
10% level -3.196411

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

Null Hypothesis: D(IP) has a unit root

Exogenous: Constant, Linear Trend
Bandwidth: 12 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -28.28807 0.0000

Test critical values: 1% level -4.219126
5% level -3.533083
10% level -3.198312

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

According to the PP test, Ho has failed to reject at levels and first difference. Therefore, it can be
concluded that the IP has stationary at levels and first difference.

7
Results of the correlogram at levels and first difference are as bellow,

At levels

Date: 02/18/17 Time: 19:58

Sample: 2008Q1 2017Q4
Included observations: 40

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

. |**** | . |**** | 1 0.563 0.563 13.633 0.000

. |***** | . |*** | 2 0.637 0.468 31.552 0.000
. |*** | .*| . | 3 0.418 -0.068 39.474 0.000
. |***** | . |*** | 4 0.632 0.416 58.132 0.000
. |** | ***| . | 5 0.244 -0.469 60.983 0.000
. |** | .|. | 6 0.336 0.009 66.561 0.000
. |*. | .|. | 7 0.134 -0.001 67.475 0.000
. |** | . |*. | 8 0.349 0.156 73.868 0.000
.|. | .|. | 9 0.067 -0.012 74.114 0.000
. |*. | .|. | 10 0.196 -0.017 76.275 0.000
.|. | .|. | 11 0.030 -0.009 76.328 0.000
. |** | .|. | 12 0.242 0.045 79.845 0.000
.|. | .|. | 13 0.013 -0.022 79.856 0.000
. |*. | .*| . | 14 0.096 -0.155 80.447 0.000
.|. | .|. | 15 -0.051 0.035 80.624 0.000
. |*. | .*| . | 16 0.080 -0.137 81.074 0.000
.*| . | .*| . | 17 -0.151 -0.093 82.730 0.000
.|. | . |*. | 18 -0.051 0.094 82.932 0.000
.*| . | .|. | 19 -0.159 0.026 84.948 0.000
.|. | .|. | 20 -0.021 0.042 84.986 0.000

At first difference

Date: 02/18/17 Time: 19:59

Sample: 2008Q1 2017Q4
Included observations: 39

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

****| . | ****| . | 1 -0.610 -0.610 15.669 0.000

. |** | .*| . | 2 0.284 -0.142 19.144 0.000
****| . | *****| . | 3 -0.567 -0.741 33.422 0.000
. |******| . |** | 4 0.801 0.292 62.737 0.000
****| . | .*| . | 5 -0.546 -0.077 76.770 0.000
. |** | .*| . | 6 0.293 -0.138 80.934 0.000
****| . | .*| . | 7 -0.498 -0.128 93.305 0.000
. |***** | .*| . | 8 0.676 -0.075 116.85 0.000
***| . | .|. | 9 -0.455 0.024 127.88 0.000

8
 . |** | .|. | 10 0.273 -0.037 132.00 0.000
***| . | . |*. | 11 -0.407 0.100 141.44 0.000
. |**** | .|. | 12 0.531 -0.000 158.15 0.000
***| . | .|. | 13 -0.400 -0.052 167.98 0.000
. |** | .*| . | 14 0.235 -0.088 171.51 0.000
**| . | .|. | 15 -0.318 -0.045 178.25 0.000
. |*** | . |*. | 16 0.478 0.178 194.11 0.000

At second difference

Date: 02/18/17 Time: 19:59

Sample: 2008Q1 2017Q4
Included observations: 38

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

******| . | ******| . | 1 -0.759 -0.759 23.672 0.000

. |**** | .*| . | 2 0.534 -0.099 35.734 0.000
*****| . | ******| . | 3 -0.696 -0.775 56.781 0.000
. |******| .|. | 4 0.834 0.063 87.911 0.000
*****| . | .|. | 5 -0.656 0.052 107.72 0.000
. |**** | .*| . | 6 0.494 -0.088 119.30 0.000
****| . | .*| . | 7 -0.613 -0.096 137.71 0.000
. |***** | .|. | 8 0.708 -0.055 163.08 0.000
****| . | .|. | 9 -0.552 0.053 179.06 0.000
. |*** | .*| . | 10 0.417 -0.083 188.51 0.000
****| . | . |*. | 11 -0.486 0.122 201.81 0.000
. |**** | . |*. | 12 0.567 0.137 220.63 0.000
****| . | .|. | 13 -0.478 -0.015 234.54 0.000
. |*** | .|. | 14 0.361 0.002 242.79 0.000
***| . | .*| . | 15 -0.416 -0.133 254.21 0.000
. |**** | .|. | 16 0.498 -0.007 271.33 0.000

According to the correlogram, IP has a unit root at levels, first difference and second difference

Overall comment

There is conflict of result obtained from ADF with PP & correlogram of the stationarity.

9
Time plot of dLOGIP
DLOGIP
.16

.12

.08

.04

.00

-.04

-.08

-.12
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

According to the above time plot, dLGOIP is stationary.

Testing Unit Root

To test the unit root, two methods of augmented Dickey-Fuller test and Phillips-Perron test will
be used.

Hypothesis :

H0 : IP has a unit root

H1 : IP has not a unit root

Test 1 : Augmented Dickey-Fuller

At levels
Null Hypothesis: DLOGIP has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 3 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.063639 0.1305

Test critical values: 1% level -4.243644
5% level -3.544284
10% level -3.204699

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

10
At First Difference

Null Hypothesis: D(DLOGIP) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 2 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -17.74982 0.0000

Test critical values: 1% level -4.243644
5% level -3.544284
10% level -3.204699

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

According to the ADF test, Ho has fails to reject at levels and rejected and first difference.
Therefore, it can be concluded that the dLOGIP has stationary at its first difference.

Test 2 : Phillips-Perron test

At levels

Null Hypothesis: DLOGIP has a unit root

Exogenous: Constant, Linear Trend
Bandwidth: 12 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -28.57135 0.0000

Test critical values: 1% level -4.219126
5% level -3.533083
10% level -3.198312

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

According to the PP test, dLOGIP has stationary at levels.

Results of the correlogram at levels, first difference and second difference are as bellow,

At levels

11
Date: 02/18/17 Time: 20:05
Sample: 2008Q1 2017Q4
Included observations: 39

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

****| . | ****| . | 1 -0.613 -0.613 15.831 0.000

. |** | .*| . | 2 0.286 -0.145 19.365 0.000
****| . | *****| . | 3 -0.569 -0.748 33.746 0.000
. |******| . |** | 4 0.805 0.285 63.364 0.000
****| . | .*| . | 5 -0.548 -0.070 77.505 0.000
. |** | .*| . | 6 0.288 -0.162 81.520 0.000
****| . | .*| . | 7 -0.496 -0.143 93.832 0.000
. |***** | .*| . | 8 0.680 -0.096 117.68 0.000
***| . | .|. | 9 -0.457 -0.001 128.79 0.000
. |** | .|. | 10 0.265 -0.060 132.67 0.000
***| . | . |*. | 11 -0.401 0.086 141.84 0.000
. |**** | .|. | 12 0.534 -0.014 158.74 0.000
***| . | .*| . | 13 -0.402 -0.082 168.69 0.000
. |** | .*| . | 14 0.235 -0.074 172.21 0.000
**| . | .|. | 15 -0.318 -0.057 178.95 0.000
. |*** | . |*. | 16 0.475 0.154 194.61 0.000

At first Difference

Date: 02/18/17 Time: 20:05

Sample: 2008Q1 2017Q4
Included observations: 38

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

******| . | ******| . | 1 -0.763 -0.763 23.906 0.000

. |**** | .*| . | 2 0.536 -0.109 36.043 0.000
*****| . | ******| . | 3 -0.696 -0.787 57.050 0.000
. |******| .|. | 4 0.837 0.027 88.406 0.000
*****| . | .|. | 5 -0.658 0.058 108.37 0.000
. |**** | .*| . | 6 0.490 -0.090 119.77 0.000
****| . | .*| . | 7 -0.609 -0.103 137.93 0.000
. |***** | .*| . | 8 0.709 -0.069 163.42 0.000
****| . | .|. | 9 -0.553 0.045 179.44 0.000
. |*** | .*| . | 10 0.411 -0.086 188.60 0.000
****| . | . |*. | 11 -0.481 0.115 201.62 0.000
. |**** | . |*. | 12 0.569 0.151 220.54 0.000
****| . | .|. | 13 -0.480 -0.021 234.55 0.000
. |*** | .|. | 14 0.360 0.020 242.77 0.000
***| . | .*| . | 15 -0.413 -0.115 254.05 0.000
. |**** | .|. | 16 0.494 -0.035 270.91 0.000

12
At second Difference

Date: 02/18/17 Time: 20:05

Sample: 2008Q1 2017Q4
Included observations: 37

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

******| . | ******| . | 1 -0.850 -0.850 28.964 0.000

. |***** | .|. | 2 0.708 -0.054 49.611 0.000
******| . | *****| . | 3 -0.778 -0.687 75.305 0.000
. |******| .|. | 4 0.842 0.039 106.30 0.000
*****| . | . |** | 5 -0.725 0.214 129.98 0.000
. |**** | .|. | 6 0.620 -0.004 147.87 0.000
*****| . | .*| . | 7 -0.678 -0.111 169.98 0.000
. |***** | .*| . | 8 0.712 -0.076 195.23 0.000
****| . | . |*. | 9 -0.596 0.118 213.53 0.000
. |**** | .*| . | 10 0.492 -0.127 226.49 0.000
****| . | .|. | 11 -0.535 -0.063 242.37 0.000
. |**** | . |*. | 12 0.588 0.168 262.35 0.000
****| . | .*| . | 13 -0.521 -0.090 278.64 0.000
. |*** | .|. | 14 0.441 -0.004 290.85 0.000
***| . | .|. | 15 -0.467 0.029 305.13 0.000
. |**** | .*| . | 16 0.495 -0.084 321.94 0.000

According to the results of correlogram, dLOGIP is not stationary at levels, first difference and
second difference.

Overall Comment

Results of above three methods are contradictory and may cannot use for further time
series analysis.

4. Estimating the equation

Model : dLOGIPt = c0 +c1 dCSIt.

Dependent Variable: DLOGIP

Method: Least Squares
Date: 02/18/17 Time: 20:39
Sample (adjusted): 2008Q2 2017Q4
Included observations: 39 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

13
 C 0.004879 0.009152 0.533120 0.5971
DCSI -0.001354 0.004593 -0.294718 0.7699

R-squared 0.002342 Mean dependent var 0.005203

Adjusted R-squared -0.024622 S.D. dependent var 0.056057
S.E. of regression 0.056743 Akaike info criterion -2.850657
Sum squared resid 0.119130 Schwarz criterion -2.765346
Log likelihood 57.58781 Hannan-Quinn criter. -2.820048
F-statistic 0.086858 Durbin-Watson stat 3.166412
Prob(F-statistic) 0.769857

Coefficient of determination or R2, describes that the dCSI is describing 0.2% of the dLOGIP,
which can be interpreted as the fitted model cannot be used for forecasting or dCSI does not
explain the dLOGIP. Probability of F statistics is also not significant at 95% confidence interval
and this indicates that, overall, the model applied cannot significantly predict the dependent
variable, dLOGIP. Durbin Watson statistics results of 3.166, reflect there is a autocorrelation in
the sample. Also, the probability values of the coefficients are more than 5% and implies that they
are not significant. By considering the above results, it can be concluded that the fitted model is
not acceptable for future forecasting purposes. Therefore, further diagnostic testing of the model
is not relevant.

5. Estimation the equation

Model : dlogIPt = c0 +c1 dCSIt-1

Dependent Variable: DLOGIP

Method: Least Squares
Date: 02/18/17 Time: 20:46
Sample (adjusted): 2008Q3 2017Q4
Included observations: 38 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 0.004810 0.009352 0.514293 0.6102

DCSI(-1) -9.50E-05 0.005058 -0.018786 0.9851

R-squared 0.000010 Mean dependent var 0.004821

Adjusted R-squared -0.027768 S.D. dependent var 0.056758
S.E. of regression 0.057540 Akaike info criterion -2.821467
Sum squared resid 0.119192 Schwarz criterion -2.735278
Log likelihood 55.60787 Hannan-Quinn criter. -2.790801
F-statistic 0.000353 Durbin-Watson stat 3.117901
Prob(F-statistic) 0.985115

Coefficient of determination or R2, describes that the lag of dCSI is not describing the dLOGIP,

14
which can be interpreted as the fitted model cannot be used for forecasting or dCSI does not
explain the dLOGIP. Probability of F statistics is also not significant at 95% confidence interval
and this indicates that, overall, the model applied cannot significantly predict the dependent
variable, dLOGIP. Durbin Watson statistics results of 3.118, reflect there is a autocorrelation in
the sample. Also, the probability values of the coefficients are more than 5% and implies that they
are not significant. By considering the above results, it can be concluded that the fitted model is
not acceptable for future forecasting purposes.

Diagnostic Tests

Residual Plot
10
Series: Residuals
Sample 2008Q3 2017Q4
8 Observations 38

Mean 1.83e-18
6 Median -0.007194
Maximum 0.116696
Minimum -0.093399
Std. Dev. 0.056757
4
Skewness 0.257311
Kurtosis 2.094757
2
Jarque-Bera 1.716809
Probability 0.423838
0
-0.10 -0.05 0.00 0.05 0.10

Correlogram of residuals

Date: 02/18/17 Time: 20:48

Sample: 2008Q1 2017Q4
Included observations: 38

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

****| . | ****| . | 1 -0.605 -0.605 15.056 0.000

. |** | .*| . | 2 0.280 -0.137 18.357 0.000
****| . | *****| . | 3 -0.566 -0.735 32.276 0.000
. |******| . |** | 4 0.803 0.321 61.137 0.000
****| . | .|. | 5 -0.543 -0.064 74.704 0.000
. |** | .*| . | 6 0.277 -0.169 78.357 0.000
****| . | .*| . | 7 -0.496 -0.148 90.425 0.000
. |***** | .*| . | 8 0.679 -0.100 113.79 0.000
***| . | .|. | 9 -0.447 0.002 124.26 0.000
. |** | .*| . | 10 0.253 -0.070 127.74 0.000
***| . | .|. | 11 -0.401 0.063 136.81 0.000
. |**** | .|. | 12 0.540 -0.019 153.85 0.000
***| . | .*| . | 13 -0.393 -0.090 163.23 0.000
. |** | .|. | 14 0.228 -0.050 166.51 0.000
**| . | .|. | 15 -0.318 -0.013 173.21 0.000
. |*** | . |*. | 16 0.472 0.154 188.61 0.000

15
Residual plot reflects that, the probability value of Jarque-Bera test is 0.42, which is higher than
0.05. It indicates that the residuals are not normal. According to the correlogram of residuals, Q
statistic of Ljung–Box for all the 16 lags has values less than 0.05 thus the null hypothesis can be
rejected i.e. there is an autocorrelation for the examined residuals of the series.

Model : dlogIPt = c0 +c1 dCSIt-1+c2 dCSIt-2+c3 dCSIt-3+c4 dCSIt-4

Dependent Variable: DLOGIP

Method: Least Squares
Date: 02/18/17 Time: 20:52
Sample (adjusted): 2009Q2 2017Q4
Included observations: 35 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 0.007041 0.008736 0.806018 0.4266

DCSI(-1) 0.004440 0.005023 0.883810 0.3838
DCSI(-2) -0.010816 0.005179 -2.088411 0.0453
DCSI(-3) 0.008838 0.005096 1.734255 0.0931
DCSI(-4) 0.003603 0.004969 0.725071 0.4740

R-squared 0.253966 Mean dependent var 0.006223

Adjusted R-squared 0.154495 S.D. dependent var 0.055944
S.E. of regression 0.051441 Akaike info criterion -2.965181
Sum squared resid 0.079387 Schwarz criterion -2.742989
Log likelihood 56.89067 Hannan-Quinn criter. -2.888480
F-statistic 2.553164 Durbin-Watson stat 3.012972
Prob(F-statistic) 0.059358

Coefficient of determination or R2, describes that the independent variables are describing only
25% of the dLOGIP, which can be interpreted as the fitted model cannot be used for
forecasting. Probability of F statistics is also not significant at 95% confidence interval and this
indicates that, overall, the model applied cannot significantly predict the dependent variable,
dLOGIP. Durbin Watson statistics results of 3.019, reflect there is a autocorrelation in the
sample. Also, the probability values of the coefficients are more than 5% except dCSI(-2). By
considering the above results, it can be concluded that the fitted model is not acceptable for
future forecasting purposes.

Diagnostic Tests

Residual Plot

16
10
Series: Residuals
Sample 2009Q2 2017Q4
8 Observations 35

Mean -7.93e-19
6 Median -0.006159
Maximum 0.124687
Minimum -0.074210
Std. Dev. 0.048321
4
Skewness 0.423954
Kurtosis 2.625790
2
Jarque-Bera 1.252681
Probability 0.534544
0
-0.05 0.00 0.05 0.10

Correlogram of residuals

Date: 02/18/17 Time: 20:52

Sample: 2008Q1 2017Q4
Included observations: 35

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

****| . | ****| . | 1 -0.547 -0.547 11.391 0.001

. |** | .*| . | 2 0.224 -0.107 13.356 0.001
***| . | ***| . | 3 -0.367 -0.418 18.799 0.000
. |**** | . |*. | 4 0.504 0.205 29.394 0.000
***| . | .|. | 5 -0.361 -0.011 35.019 0.000
. |*. | .*| . | 6 0.169 -0.081 36.289 0.000
**| . | .*| . | 7 -0.247 -0.112 39.102 0.000
. |*** | . |*. | 8 0.422 0.170 47.663 0.000
**| . | .|. | 9 -0.337 0.004 53.324 0.000
. |*. | .|. | 10 0.195 0.042 55.303 0.000
**| . | .|. | 11 -0.205 0.031 57.569 0.000
. |** | .|. | 12 0.252 -0.058 61.140 0.000
**| . | .|. | 13 -0.248 -0.051 64.770 0.000
. |*. | .*| . | 14 0.088 -0.167 65.251 0.000
.*| . | .*| . | 15 -0.130 -0.161 66.349 0.000
. |** | . |*. | 16 0.294 0.095 72.248 0.000

Residual plot reflects that, the probability value of Jarque-Bera test is 0.53, which is higher than
0.05. It indicates that the residuals are not normal. According to the correlogram of residuals, Q
statistic of Ljung–Box for all the 16 lags has values less than 0.05 thus the null hypothesis can be
rejected i.e. there is an autocorrelation for the examined residuals of the series.

Conclusion

By considering the results of two models of dlogIPt = c0 +c1 dCSIt-1 and dlogIPt = c0 +c1
dCSIt-1+c2 dCSIt-2+c3 dCSIt-3+c4 dCSIt-4, it can be concluded both of the models cannot be
used for future forecasting purposes.

17
 6. Causality test

Pairwise Granger Causality Tests

Date: 02/21/17 Time: 21:05
Sample: 2008Q1 2017Q4
Lags: 2

Null Hypothesis: Obs F-Statistic Prob.

DLOGIP does not Granger Cause DCSI 37 2.64693 0.0863

DCSI does not Granger Cause DLOGIP 2.34790 0.1118

According to the Granger causality test results, it failed to reject the null hypothesizes since the
probability values are higher than 0.05. Therefore, it can conclude that, each variable does not
contain any useful information about each other.

7. Cointegration test

Date: 02/21/17 Time: 20:53

Sample (adjusted): 2008Q4 2017Q4
Included observations: 37 after adjustments
Trend assumption: Linear deterministic trend
Series: DLOGIP DCSI
Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.595331 45.19965 15.49471 0.0000

At most 1 * 0.271615 11.72624 3.841466 0.0006

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 Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.595331 33.47342 14.26460 0.0000

At most 1 * 0.271615 11.72624 3.841466 0.0006

Max-eigenvalue 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

18
Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):

DLOGIP DCSI
-37.82042 -0.204244
22.73688 -0.869705

Unrestricted Adjustment Coefficients (alpha):

D(DLOGIP) 0.046765 -0.005090

D(DCSI) 0.621566 1.037643

1 Cointegrating Equation(s): Log likelihood -12.35885

Normalized cointegrating coefficients (standard error in parentheses)

DLOGIP DCSI
1.000000 0.005400
(0.00323)

Adjustment coefficients (standard error in parentheses)

D(DLOGIP) -1.768660
(0.26186)
D(DCSI) -23.50789
(13.5354)

Both tests of Unrestricted Cointegration Rank Test (Trace) and Unrestricted Cointegration Rank
Test (Maximum Eigenvalue) indicates that there are cointegration. Therefore, it can conclude
that there is long run relationship among two variables.

8. Vector Autoregressive (VAR) model fitting

Vector Autoregression Estimates

Date: 02/21/17 Time: 21:09
Sample (adjusted): 2008Q4 2017Q4
Included observations: 37 after adjustments
Standard errors in ( ) & t-statistics in [ ]

DLOGIP DCSI

DLOGIP(-1) -0.719094 7.387601

(0.16495) (7.42180)
[-4.35937] [ 0.99539]

DLOGIP(-2) -0.165295 -7.302718

(0.17395) (7.82639)
[-0.95027] [-0.93309]

DCSI(-1) 0.002466 0.052349

(0.00421) (0.18951)
[ 0.58555] [ 0.27624]

19
 DCSI(-2) -0.007591 -0.081743
(0.00390) (0.17535)
[-1.94777] [-0.46617]

C 0.010095 -0.223009
(0.00719) (0.32334)
[ 1.40475] [-0.68971]

R-squared 0.488138 0.146710

Adj. R-squared 0.424155 0.040049
Sum sq. resids 0.057573 116.5496
S.E. equation 0.042416 1.908449
F-statistic 7.629209 1.375475
Log likelihood 67.11336 -73.72761
Akaike AIC -3.357479 4.255547
Schwarz SC -3.139787 4.473238
Mean dependent 0.007006 -0.243243
S.D. dependent 0.055896 1.947852

Determinant resid covariance (dof adj.) 0.006511

Determinant resid covariance 0.004870
Log likelihood -6.495729
Akaike information criterion 0.891661
Schwarz criterion 1.327044

Inverse Roots of AR Characteristic Polynomial

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Above figure shows the fitted VAR model is stable since all roots falls inside the unit circle.

Impulse test

20
 Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of DLOGIP to DLOGIP Response of DLOGIP to DCSI
.06 .06

.04 .04

.02 .02

.00 .00

-.02 -.02

-.04 -.04

-.06 -.06
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Response of DCSI to DLOGIP Response of DCSI to DCSI

3 3

2 2

1 1

0 0

-1 -1

-2 -2
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Any shock to the Industrial production index, it will negatively to effect itself within two years and
then effect positively in next year. Thereafter, the effect of the shock die out. Any shock to the
Industrial production index, it will positively to effect to consumer sentiment index within two
years and then effect negatively and positively in next one year each. Thereafter, the effect of
the shock die out. Shock negatively effect to CSI itself up to two years and die it out.

9. Vector Error Correction model

VECM

Vector Error Correction Estimates

Date: 02/21/17 Time: 21:52
Sample (adjusted): 2009Q1 2017Q4
Included observations: 36 after adjustments
Standard errors in ( ) & t-statistics in [ ]

Cointegrating Eq: CointEq1

DLOGIP(-1) 1.000000

21
 DCSI(-1) 0.001649
(0.00167)
[ 0.98855]

C -0.004999

Error Correction: D(DLOGIP) D(DCSI)

CointEq1 -3.126178 -26.47592

(0.29639) (22.4748)
[-10.5476] [-1.17803]

D(DLOGIP(-1)) 1.367400 32.14520

(0.22417) (16.9986)
[ 6.09980] [ 1.89105]

D(DLOGIP(-2)) 0.746089 12.38254

(0.11839) (8.97726)
[ 6.30204] [ 1.37932]

D(DCSI(-1)) 0.003755 -0.584638

(0.00231) (0.17498)
[ 1.62743] [-3.34118]

D(DCSI(-2)) 0.000285 -0.274201

(0.00216) (0.16411)
[ 0.13152] [-1.67082]

C -0.000484 -0.177503
(0.00471) (0.35703)
[-0.10273] [-0.49716]

R-squared 0.931515 0.442741

Adj. R-squared 0.920100 0.349865
Sum sq. resids 0.023892 137.3797
S.E. equation 0.028221 2.139935
F-statistic 81.60998 4.766987
Log likelihood 80.63731 -75.18792
Akaike AIC -4.146517 4.510440
Schwarz SC -3.882597 4.774360
Mean dependent -3.54E-05 -0.138889
S.D. dependent 0.099838 2.653986

Determinant resid covariance (dof adj.) 0.003514

Determinant resid covariance 0.002440
Log likelihood 6.117983
Akaike information criterion 0.437890
Schwarz criterion 1.053703

D(DLOGIP) = C(1)*( DLOGIP(-1) + 0.0016488289796*DCSI(-1) - 0.00499869582335 ) + C(2)*D(DLOGIP(-1)) +

C(3)*D(DLOGIP(-2)) + C(4)*D(DCSI(-1)) + C(5)*D(DCSI(-2)) + C(6)

D(DCSI) = C(7)*( DLOGIP(-1) + 0.0016488289796*DCSI(-1) - 0.00499869582335 ) + C(8)*D(DLOGIP(-1)) +

C(9)*D(DLOGIP(-2)) + C(10)*D(DCSI(-1)) + C(11)*D(DCSI(-2)) + C(12)

22
Dependent Variable: D(DLOGIP)
Method: Least Squares
Date: 02/21/17 Time: 22:28
Sample (adjusted): 2009Q1 2017Q4
Included observations: 36 after adjustments
D(DLOGIP) = C(1)*( DLOGIP(-1) + 0.0016488289796*DCSI(-1) -
0.00499869582335 ) + C(2)*D(DLOGIP(-1)) + C(3)*D(DLOGIP(-2)) +
C(4)*D(DCSI(-1)) + C(5)*D(DCSI(-2)) + C(6)

Coefficient Std. Error t-Statistic Prob.

C(1) -3.126178 0.296388 -10.54758 0.0000

C(2) 1.367400 0.224171 6.099800 0.0000
C(3) 0.746089 0.118388 6.302042 0.0000
C(4) 0.003755 0.002308 1.627434 0.1141
C(5) 0.000285 0.002164 0.131520 0.8962
C(6) -0.000484 0.004708 -0.102725 0.9189

R-squared 0.931515 Mean dependent var -3.54E-05

Adjusted R-squared 0.920100 S.D. dependent var 0.099838
S.E. of regression 0.028221 Akaike info criterion -4.146517
Sum squared resid 0.023892 Schwarz criterion -3.882597
Log likelihood 80.63731 Hannan-Quinn criter. -4.054402
F-statistic 81.60998 Durbin-Watson stat 1.255039
Prob(F-statistic) 0.000000

Wald Test:
Equation: Untitled

Test Statistic Value df Probability

F-statistic 1.696872 (2, 30) 0.2004

Chi-square 3.393744 2 0.1833

Null Hypothesis: C(4) = C(5) = 0

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(4) 0.003755 0.002308

C(5) 0.000285 0.002164

Restrictions are linear in coefficients.

10. Based on all of the above tests, it can be come to conclusion data obtained for Industrial
production index and consumer sentiment index are not suitable for time series analysis.
Therefore, it cannot be coming to a conclusion about the behaviours of the variables.

23
Exercise 02

1. Time plot of consumption and industrial production index

CONS
5,200

5,000

4,800

4,600

4,400

4,200
08 09 10 11 12 13 14 15 16 17

IP
115

110

105

100

95

90

85
08 09 10 11 12 13 14 15 16 17

According to the above plots, it can be identified positive trend in both variables.

24
 2. Time plots of LOGIP and LOGCONS
LOGCONS
8.52

8.48

8.44

8.40

8.36
08 09 10 11 12 13 14 15 16 17

LOGIP
4.72

4.68

4.64

4.60

4.56

4.52

4.48

4.44
08 09 10 11 12 13 14 15 16 17

Log values of two variables also have a positive trend over the time

25
 3. Fitting the model log(IP)t = c + c1 log(CONS)t

Dependent Variable: LOGIP

Method: Least Squares
Date: 02/24/17 Time: 11:20
Sample: 2008Q1 2017Q4
Included observations: 40

Variable Coefficient Std. Error t-Statistic Prob.

C -7.277994 1.160596 -6.270909 0.0000

LOGCONS 1.402690 0.137247 10.22019 0.0000

R-squared 0.733244 Mean dependent var 4.583395

Adjusted R-squared 0.726224 S.D. dependent var 0.063995
S.E. of regression 0.033485 Akaike info criterion -3.906757
Sum squared resid 0.042606 Schwarz criterion -3.822313
Log likelihood 80.13513 Hannan-Quinn criter. -3.876224
F-statistic 104.4522 Durbin-Watson stat 1.486289
Prob(F-statistic) 0.000000

Coefficient of determination or R2, describes that the log(CONS) is describing 73.3% of the
log(IP). Probability of F statistics is significant at 95% confidence interval and this indicates that,
overall, the model applied can predict the dependent variable, log(IP). Durbin Watson statistics
results of 1.48, reflect there is an autocorrelation in the sample. Also, the probability values of the
coefficients are less than 5% and implies that they are significant. By considering the overall
results, the fitted model can be used for future forecasting purposes. Therefore, further diagnostic
testing of the model should be carried out.

Plot of residuals

26
.06

.04

.02

.00

-.02

-.04

-.06

-.08
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

LOGIP Residuals

Residual plot reflects that they are stationary and acceptable.

Performing the Philip-Perron unit root test

Null Hypothesis: RESID01 has a unit root

Exogenous: Constant
Bandwidth: 5 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -4.972182 0.0002

Test critical values: 1% level -3.610453
5% level -2.938987
10% level -2.607932

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

PP test statistics shows that the residuals have no unit root and it can be concluded that
residuals are stationary.

Performing Engle-Granger test for cointegration

Date: 02/24/17 Time: 12:43

Series: RESID05
Sample: 2008Q1 2017Q4
Included observations: 40
Null hypothesis: Series are not cointegrated
Cointegrating equation deterministics: C
Automatic lags specification based on Schwarz criterion (maxlag=9)

27
 Dependent tau-statistic Prob.* z-statistic Prob.*
RESID05 -1.713030 0.4161 -12.97811 0.0444

*MacKinnon (1996) p-values.

Since the probability value of the above test is less than 0.05, which rejects the null hypothesis
of series are not cointegrated.

4. Johanson test for Cointegration

Date: 02/24/17 Time: 11:23

Sample (adjusted): 2008Q3 2017Q4
Included observations: 38 after adjustments
Trend assumption: Linear deterministic trend
Series: LOGIP LOGCONS
Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.459391 26.32739 15.49471 0.0008

At most 1 0.074821 2.955182 3.841466 0.0856

Trace test indicates 1 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 Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.459391 23.37221 14.26460 0.0014

At most 1 0.074821 2.955182 3.841466 0.0856

Max-eigenvalue test indicates 1 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 Cointegrating Coefficients (normalized by b'*S11*b=I):

LOGIP LOGCONS
-38.50884 59.33227
9.333443 15.35330

Unrestricted Adjustment Coefficients (alpha):

D(LOGIP) 0.022388 -0.005541

D(LOGCONS) -0.002092 -0.002666

28
1 Cointegrating Equation(s): Log likelihood 202.6658

Normalized cointegrating coefficients (standard error in parentheses)

LOGIP LOGCONS
1.000000 -1.540744
(0.13961)

Adjustment coefficients (standard error in parentheses)

D(LOGIP) -0.862139
(0.20887)
D(LOGCONS) 0.080544
(0.06609)

Both tests of Unrestricted Cointegration Rank Test (Trace) and Unrestricted Cointegration Rank
Test (Maximum Eigenvalue) indicates that there are cointegration. Therefore, it can conclude
that there is long run relationship among two variables.

5. Fitting VECM

Vector Error Correction Estimates

Date: 02/24/17 Time: 11:29
Sample (adjusted): 2008Q4 2017Q4
Included observations: 37 after adjustments
Standard errors in ( ) & t-statistics in [ ]

Cointegrating Eq: CointEq1

LOGIP(-1) 1.000000

LOGCONS(-1) -2.111149
(0.25737)
[-8.20273]

C 13.27408

Error Correction: D(LOGIP) D(LOGCONS)

CointEq1 -0.189025 0.122590

(0.18020) (0.05519)
[-1.04896] [ 2.22114]

D(LOGIP(-1)) -0.228392 -0.126850

(0.16863) (0.05165)
[-1.35444] [-2.45612]

29
 D(LOGIP(-2)) -0.462643 0.027704
(0.15969) (0.04891)
[-2.89711] [ 0.56643]

D(LOGCONS(-1)) -0.892127 -0.498817

(0.54093) (0.16568)
[-1.64925] [-3.01080]

D(LOGCONS(-2)) 1.556990 0.062685

(0.51929) (0.15905)
[ 2.99828] [ 0.39412]

C 0.006222 0.005514
(0.00632) (0.00194)
[ 0.98435] [ 2.84801]

R-squared 0.712381 0.812764

Adj. R-squared 0.665991 0.782565
Sum sq. resids 0.032350 0.003035
S.E. equation 0.032304 0.009894
F-statistic 15.35631 26.91336
Log likelihood 77.77712 121.5575
Akaike AIC -3.879844 -6.246352
Schwarz SC -3.618614 -5.985122
Mean dependent 0.007006 0.004076
S.D. dependent 0.055896 0.021218

Determinant resid covariance (dof adj.) 7.10E-08

Determinant resid covariance 4.98E-08
Log likelihood 206.0676
Akaike information criterion -10.38203
Schwarz criterion -9.772497

Dependent Variable: D(LOGIP)

Method: Least Squares
Date: 02/24/17 Time: 13:04
Sample (adjusted): 2008Q4 2017Q4
Included observations: 37 after adjustments
D(LOGIP) = C(1)*( LOGIP(-1) - 2.11114892857*LOGCONS(-1) +
13.2740828005 ) + C(2)*D(LOGIP(-1)) + C(3)*D(LOGIP(-2)) + C(4)
*D(LOGCONS(-1)) + C(5)*D(LOGCONS(-2)) + C(6)

Coefficient Std. Error t-Statistic Prob.

C(1) -0.189025 0.180202 -1.048961 0.3023

C(2) -0.228392 0.168625 -1.354439 0.1854
C(3) -0.462643 0.159691 -2.897111 0.0069
C(4) -0.892127 0.540929 -1.649251 0.1092
C(5) 1.556990 0.519294 2.998280 0.0053
C(6) 0.006222 0.006321 0.984348 0.3326

R-squared 0.712381 Mean dependent var 0.007006

Adjusted R-squared 0.665991 S.D. dependent var 0.055896

30
S.E. of regression 0.032304 Akaike info criterion -3.879844
Sum squared resid 0.032350 Schwarz criterion -3.618614
Log likelihood 77.77712 Hannan-Quinn criter. -3.787749
F-statistic 15.35631 Durbin-Watson stat 2.255229
Prob(F-statistic) 0.000000

According to the above results, estimated coefficient of C(3) indicates that about 46% per cent
of this disequilibrium is corrected between two quarters.

31