ASSIGNMENT 2

Q) Use the three variables you have taken for assignment 1 and run the ADF, PP and KPSS tests
and interpret the results. You should present the results (the test statics, critical value and p
value) in a table and infer whether each series is I(0) or I(1) or I(2). You can submit either the word
file or pdf. Please write down the name of the variable and present the graph as well. 
 POPULATION GROWTH RATE

In the Population Growth Rate data, we find that the mean and variance are time variant and hence
it is Non Stationary Stochastic Variable. There is continuous downtrend in the data obtained and
hence we can interpret it as a Random Walk Model with a Drift. We will run 3 types of tests which
are Augmented Dicky-Fuller Test (ADF), Phillips-Perron Test (PP) and Kwiatkowski, Phillips, Schmidt
and Shin (KPSS) Test.

AUGMENTED PHILLIPS -PERRON KPSS TEST

DICKY- TEST (PP)
FULLER TEST
(ADF)
TEST STATISTICS Ho: Population Growth Ho: Population Growth Ho: Population Growth
Rate has Unit Root. Rate has Unit Root Rate is Stationary

We reject Ho since P We reject Ho since P We fail to reject Ho

value (0.0025) is less Value (0.0061) is less since P value (0.738) is
than 5% level and than the 5% level (1.95) greater than the 5%
conclude that and conclude that level (0.463) and
Population Growth Rate Population Growth Rate conclude that
does not have Unit does not have Unit Population Growth Rate
Root. Root. is Stationary.
CRITICAL VALUE 1% level: 2.627 1% level: 2.626 1% level: 0.739
5% level: 1.95 5% level: 1.95 5% level: 0.463
10% level: 1.611 10% level: 1.611 10% level: 0.347

P- VALUE 0.0025 0.0061 0.738

INTEGRATED It is an Integrated It is an Integrated It is an Integrated
Process of Order 2 Process of Order 2 Process of Order 0
PROCESS i.e. I(2) i.e. I(2) i.e. I(0)
In the Graph above, the horizontal axis represents Years and the vertical axis represents absolute
Population Growth rate. We observe that the Population Growth Rate has fallen from 0.023 in 1971
to 0.014 (approx) in 2010 and hence conclude that it is Random Walk Model with Drift.
 GDP GROWTH RATE

In the Gross Domestic Product (GDP) Growth Rate data, we find that the mean and variance
are time variant and hence it is Non Stationary Stochastic Variable. The GDP Growth Rate from 1981-
2010 is averaged at 5.25% and shows no deterministic trend. It rather shows a Random Walk Model
without Drift. We will run 3 types of tests which are Augmented Dicky-Fuller Test (ADF), Phillips-
Perron Test (PP) and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) Test.

AUGMENTED DICKY- PHILLIPS -PERRON KPSS TEST

FULLER TEST (ADF) TEST (PP)

TEST STATISTICS Ho: GDP Growth Rate has Ho: GDP Growth Rate Ho: GDP Growth Rate is
Unit Root. has Unit Root. Stationary.

We Fail to reject Ho since We Fail to reject Ho We fail to Reject Ho

the P Value (0.58) is
greater than 5% level or
0.05 and conclude that
GDP Growth Rate has a
Unit Root.
since the P value since the P value (0.72)
(0.0914) is greater than is greater than 5% level
5% level or 0.05 and or 0.05 and conclude
conclude that GDP that GDP Growth Rate
Growth Rate has a Unit is Stationary.
Root.

CRITICAL VALUE 1% Level: 2.63 1% Level: 2.63 1% Level: 0.74

5% Level: 1.95 5% Level: 1.95 5% Level: 0.46
10% Level: 1.61 10% Level: 1.61 10% Level: 0.35

P- VALUE 0.5835 0.0914 0.72

INTEGRATED It is an Integrated Process It is an Integrated It is an Integrated

of order 1 i.e. Process of order 1 i.e. Process of order 0 i.e.
PROCESS I(1). I(1). I(0).
In the Graph above, the horizontal axis represents Years and the vertical axis represents absolute
GDP Growth rate. We observe that the trend line fluctuates in and around 0.03(approx) . It was
about 0.02 in 1971 and increased to about 0.9 in 2010.
 INFLATION RATE

In the Inflation Rate data, we find that the mean and variance are time invariant to a certain
extent and hence it is a Stationary Variable. The Inflation Rate is averaged at about 8% from 1971-
2010 and shows no deterministic trend. It rather shows a Stationary Trend around the mean. We will
run 3 types of tests which are Augmented Dicky-Fuller Test (ADF), Phillips-Perron Test (PP) and
Kwiatkowski, Phillips, Schmidt and Shin (KPSS) Test.

AUGMENTED PHILLIPS - KPSS TEST

DICKY- PERRON
FULLER TEST TEST (PP)
(ADF)
TEST STATISTICS Ho: Inflation Rate has Ho: Inflation Rate has Ho: Inflation Rate is
Unit Root. Unit Root. Stationary.

We reject Ho since we We fail to reject Ho We fail to reject Ho

find that P value since we find that P since we find that P
(0.049) is less than 5% value (0.083) is greater value (0.15) is greater
level or 0.05 and than 5% level or 0.05 than 5% level or 0.05
conclude that Inflation and conclude that and conclude that
Rate does not has a Inflation Rate has a Inflation Rate is
Unit Root. Unit Root. Stationary.

CRITICAL VALUE 1% Level: 2.63 1% Level: 2.63 1% Level: 0.74

5% Level: 1.95 5% Level: 1.95 5% Level: 0.46
10% Level: 1.61 10% Level: 1.61 10% Level: 0.35

P- VALUE 0.049 0.083 0.15

INTEGRATED It is an Integrated It is an Integrated It is an Integrated

Process of Order 1 Process of Order 1 Process of Order 0
PROCESS I.e. I(1) i.e. I(1) i.e. I(0)
 In the Graph above, the horizontal axis represents Years and the vertical axis represents
absolute Inflation rate. We observe that the trend line fluctuates in and around the mean 0.05.