Submitted by: Mohammad Majid Shaikh

Submitted to: Sir Dr. Tahir Mehmood

Registration # 04091213049
Subject: Time Series Econometrics
BS Economics 6th Semester

Quaid-i-Azam University, Islamabad

First Assignment:

Find Trends and remove them

Introduction

Time Series Data: We study/survey one cross section over the period.

Unobservable components in Time series:

1. Trends
2. Seasons
3. Cycles

In simple estimation data gives inaccurate results. It does not show exact impact of Independent
variable on Dependent variable. For accurate impact we have to find the effect of Trends,
Seasons, and Cycles on the model and remove them.

Trends: It is slow evolving long-run evolution in the variable that we want to estimate or
forecast.

Evolution:

a) Slow evolving Preferences

b) Slow evolving Technology
c) Slow evolving Institutions

But these things are not explicitly included in the model. All these things changes with the Time.
Time is important.

Estimation of Trends:

Estimate the model by using OLS method. Estimate it with one variable first and take it as
dependent variable and Time as Independent variable. Then estimate it with another variable
taking it as dependent variable and Time as Independent variable.

Detrend: Remove impact of trends from model. Remove it from both variables.
Then their residuals series is obtained which is the data of both variables without trend effect.

Estimation through E-views software:

 Study the impact of Exchange rate on Exports of Pakistan from time period 2002(i) to
2006(xii) (Monthly).

TIME SERIES ECONOMETRIC MODEL:

𝐸𝑋 = 𝛼 + 𝛽𝐸𝑅 + 𝜇

Here,

EX=Exports

ER=Exchange rate

Simple estimation

Dependent Variable: EX
Method: Least Squares
Date: 08/13/15 Time: 14:04
Sample: 2002M01 2006M12
Included observations: 60

Variable Coefficient Std. Error t-Statistic Prob.

C 1130.233 32.01233 35.30619 0.0000

ER 0.000636 0.000407 1.560916 0.1240

R-squared 0.040314 Mean dependent var 1136.721

Adjusted R-squared 0.023768 S.D. dependent var 248.8425
S.E. of regression 245.8674 Akaike info criterion 13.88023
Sum squared resid 3506146. Schwarz criterion 13.95004
Log likelihood -414.4068 F-statistic 2.436459
Durbin-Watson stat 0.429859 Prob(F-statistic) 0.123984
Graphical analysis

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400
1,000

200
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0
600
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-400

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5 10 15 20 25 30 35 40 45 50 55 60

Residual Actual Fitted

𝐻ₒ: 𝛽̂ = 0

𝐻1 : 𝛽̂ ≠ 0

Here 𝐻ₒ is accepted and 𝐻1 is rejected because Probability of coefficient of ER (𝛽 is 0.124).

From above results we are interested in result of coefficient of ER, which means that there is no
impact of Exchange rate on Exports.

In Time series just this analysis is of no work, because there may be impact of trends. So
therefore, we have to remove the impact of trends then we will get accurate result.
Estimation of Trends

1. Finding effect of trends on Exports data.

Dependent Variable: EX
Method: Least Squares
Date: 08/13/15 Time: 14:07
Sample: 2002M01 2006M12
Included observations: 60

Variable Coefficient Std. Error t-Statistic Prob.

C 768.7231 30.92798 24.85526 0.0000

@TREND 12.47451 0.904123 13.79735 0.0000

R-squared 0.766474 Mean dependent var 1136.721

Adjusted R-squared 0.762448 S.D. dependent var 248.8425
S.E. of regression 121.2840 Akaike info criterion 12.46691
Sum squared resid 853169.4 Schwarz criterion 12.53672
Log likelihood -372.0074 F-statistic 190.3669
Durbin-Watson stat 1.702135 Prob(F-statistic) 0.000000

Graphical analysis:
mjddmdkdkdkdkdkdk

1,600

1,400

600 1,200

400 1,000

200 800

0 600

-200

-400
2002 2003 2004 2005 2006

Residual Actual Fitted

 𝐻ₒ: 𝛽̂ = 0

𝐻1 : 𝛽̂ ≠ 0

Here 𝐻ₒ is rejected and 𝐻1 is accepted because Probability of coefficient (𝛽 is 0.000). Hence 𝐻1

is significant. This implies that Exchange rate has effect on Exports.

From above results we are interested in result of coefficient (β=12.47451), which means that
12.47451 is the effect of trends in Exchange rate data.

Detrending
Residuals Series obtained

2002M01 -63.96108
2002M02 -124.1086
2002M03 -66.28410
2002M04 -10.77860
2002M05 30.01689
2002M06 137.7674
2002M07 -24.54313
2002M08 48.09937
2002M09 4.762859
2002M10 12.43935
2002M11 -38.32216
2002M12 -39.96666
2003M01 31.79983
2003M02 -152.2087
2003M03 -2.344185
2003M04 38.29831
2003M05 85.55480
2003M06 289.2503
2003M07 -98.07922
2003M08 45.34128
2003M09 29.64677
2003M10 -18.43774
2003M11 -175.3692
2003M12 12.18325
2004M01 34.97874
2004M02 -169.6258
2004M03 -29.56027
2004M04 2.085218
2004M05 -45.90929
2004M06 402.1262
2004M07 48.75170
2004M08 41.54719
2004M09 -44.34732
2004M10 -164.3218
2004M11 -272.8683
2004M12 -64.47084
2005M01 -59.64535
2005M02 -28.20986
2005M03 119.3356
2005M04 52.68113
2005M05 117.3566
2005M06 260.4321
2005M07 -21.10239
2005M08 102.7131
2. Finding effect of trends on Exchange rate data.

Dependent Variable: ER
Method: Least Squares
Date: 08/13/15 Time: 14:09
Sample: 2002M01 2006M12
Included observations: 60

Variable Coefficient Std. Error t-Statistic Prob.

C -19236.81 19710.81 -0.975952 0.3331

@TREND 998.0514 576.2098 1.732097 0.0886

R-squared 0.049183 Mean dependent var 10205.71

Adjusted R-squared 0.032789 S.D. dependent var 78595.21
S.E. of regression 77295.93 Akaike info criterion 25.38144
Sum squared resid 3.47E+11 Schwarz criterion 25.45125
Log likelihood -759.4431 F-statistic 3.000161
Durbin-Watson stat 1.066210 Prob(F-statistic) 0.088572

Graphical analysis:

800,000

600,000
600,000

400,000 400,000

200,000
200,000

0
0

-200,000

-200,000
2002 2003 2004 2005 2006

Residual Actual Fitted

𝐻ₒ: 𝛽̂ = 0
𝐻1 : 𝛽̂ ≠ 0
 Here 𝐻ₒ is rejected and 𝐻1 is accepted because
Probability of coefficient (𝛽 is 0.0886). Hence 𝐻1 is
significant. This implies that Exchange rate has effect on
Exports.

From above results we are interested in result of

coefficient (β=998.0514), which means that 998.0514 is
the effect of trends in Exchange rate data.

Detrending
Residuals Series obtained

2002M01 19297.06
2002M02 18298.88
2002M03 17300.80
2002M04 16302.77
2002M05 15304.75
2002M06 14306.62
2002M07 13308.06
2002M08 12309.81
2002M09 11311.59
2002M10 10313.28
2002M11 9314.646
2002M12 8316.614
2003M01 7318.367
2003M02 6320.246
2003M03 5321.914
2003M04 4323.821
2003M05 3325.614
2003M06 2327.742
2003M07 1329.639
2003M08 331.5789
2003M09 -666.3383
2003M10 -1664.850
2003M11 -2663.096
2003M12 -3660.936
2004M01 -4659.007
2004M02 -5657.130
2004M03 -6655.024
2004M04 -7653.107
2004M05 -8650.931
2004M06 -9648.527
2004M07 -10646.28
2004M08 -11644.06
2004M09 -12641.62
2004M10 -13637.59
2004M11 -14637.18
2004M12 -15635.54
2005M01 -16633.72
2005M02 -17631.76
2005M03 -18629.77
2005M04 -19627.75
2005M05 -20625.68
2005M06 -21623.63
2005M07 -22621.73
2005M08 -23619.73
2005M09 -24617.76
2005M10 -25615.81
2005M11 -26613.81
2005M12 -27611.83
 2006M01 -28609.82
2006M02 -29607.85
2006M03 -30605.80
2006M04 -31603.79
2006M05 -32601.67
2006M06 -33599.74
2006M07 -34597.64
2006M08 -35595.63
2006M09 -36593.53
2006M10 -37591.52
2006M11 -38589.36
2006M12 569206.8

Conclusion:

Now, the effect of Trends has been removed from Model and residual series are obtained which
have no effect of trends in them. Estimate the model by OLS and get the accurate results of
impact of Exchange rate on Exports of Pakistan from 2002(I) to 2006(XII).
Second Assignment:

MODELING SEASONALITY

Seasonality in a time series is a regular pattern of changes that repeats over S time periods, where
S defines the number of time periods until the pattern repeats again.

For example, there is seasonality in monthly data for which high values tend always to occur in
some particular months and low values tend always to occur in other particular months. In this
case, S = 12 (months per year) is the span of the periodic seasonal behavior.

It may be monthly, weekly, quarterly, daily etc.

Note: If data is annual then we find trend, but if data is divided then we find seasonality.

Estimation through E-Views Software:

 Study the impact of Exchange rate on Exports of Pakistan from time period 2002(i)
to 2006(xii) (Monthly).

TIME SERIES ECONOMETRIC MODEL:

𝐸𝑋 = 𝛼 + 𝛽𝐸𝑅 + 𝜇

Here,

EX=Exports

ER=Exchange rate

Modeling Seasonality:
2006

𝑌 = ∑ 𝛾𝑖𝐷𝑖+∈
𝑡=2002

S=12
i=1,2,3,…….,12
Time=2002-2006
Estimate the model by OLS method
Dependent Variable: EX
Method: Least Squares
Date: 08/13/15 Time: 14:32
Sample: 2002M01 2006M12
Included observations: 60

Variable Coefficient Std. Error t-Statistic Prob.

D1 1029.180 112.5212 9.146539 0.0000

D2 964.7364 112.5212 8.573817 0.0000
D3 1123.062 112.5212 9.980890 0.0000
D4 1131.261 112.5212 10.05376 0.0000
D5 1169.716 112.5212 10.39551 0.0000
D6 1365.355 112.5212 12.13420 0.0000
D7 1104.634 112.5212 9.817120 0.0000
D8 1213.465 112.5212 10.78432 0.0000
D9 1191.674 112.5212 10.59066 0.0000
D10 1106.619 112.5212 9.834754 0.0000
D11 1028.655 112.5212 9.141878 0.0000
D12 1212.295 112.5212 10.77392 0.0000

R-squared 0.168276 Mean dependent var 1136.721

Adjusted R-squared -0.022327 S.D. dependent var 248.8425
S.E. of regression 251.6051 Akaike info criterion 14.07046
Sum squared resid 3038647. Schwarz criterion 14.48932
Log likelihood -410.1137 Durbin-Watson stat 0.190160

Graphical analysis:

1,600

1,400

1,200
600
1,000
400
800
200

0 600

-200

-400

-600
2002 2003 2004 2005 2006

Residual Actual Fitted

Here all variables are significant because probability of their coefficient is (0.0000). All the
variables have seasonal effect on Exports. If one variable is insignificant then first check
coefficients for all variables then again estimate by dropping that insignificant variable.

For removing the effect of seasons from data we do seasonal adjustment.

Seasonal adjustment

Last updated: 08/13/15 - 14:33

Modified: 2002M01 2006M12 // makeresid

2002M01 -324.4178
2002M02 -307.6474
2002M03 -395.6740
2002M04 -335.8934
2002M05 -321.0776
2002M06 -396.4916
2002M07 -285.6074
2002M08 -309.3208
2002M09 -318.3924
2002M10 -213.1856
2002M11 -173.5094
2002M12 -346.3192
2003M01 -78.96280
2003M02 -186.0534
2003M03 -182.0400
2003M04 -137.1224
2003M05 -115.8456
2003M06 -95.31460
2003M07 -209.4494
2003M08 -162.3848
2003M09 -143.8144
2003M10 -94.36860
2003M11 -160.8624
2003M12 -144.4752
2004M01 73.91020
2004M02 -53.77640
2004M03 -59.56200
2004M04 -23.64140
2004M05 -97.61560
2004M06 167.2554
2004M07 87.07560
2004M08 -16.48480
2004M09 -68.11440
2004M10 -90.55860
2004M11 -108.6674
 2004M12 -71.43520
2005M01 128.9802
2005M02 237.3336
2005M03 239.0280
2005M04 176.6486
2005M05 215.3444
2005M06 175.2554
2005M07 166.9156
2005M08 194.3752
2005M09 305.4956
2005M10 222.4614
2005M11 91.27460
2005M12 257.2448
2006M01 200.4902
2006M02 310.1436
2006M03 398.2480
2006M04 320.0086
2006M05 319.1944
2006M06 149.2954
2006M07 241.0656
2006M08 293.8152
2006M09 224.8256
2006M10 175.6514
2006M11 351.7646
2006M12 304.9848

Conclusion: Now, the effect of Seasons has been removed from Model and residual series are
obtained which have no effect of Seasons in them. Estimate the model by OLS and get the
accurate results of impact of Exchange rate on Exports of Pakistan from 2002(I) to 2006(XII).