TIME SERIES ANALYSIS HOMEWORK 5

Aditya Anand, Pranjal Das, Prasoon Bajpai, Saad Ahmad

We have chosen the GDP dataset, same as previous homework, where we did
double difference of logGDP to attain stationarity. In this homework we have
run the regression of the same (i.e. log_gdp_2) on its first, fifth, eighth and
thirteenth lag i.e. log_gdp_2(-1), log_gdp_2(-5), log_gdp_2(-8) and
log_gdp_2(-13) respectively. We have chosen to drop MA(1) and MA(5), which
we had in our previous analysis because we are running OLS regression as it
won’t be possible with MA terms in the model.

Table 1: Showing results obtained after running OLS regression

Ramsey RESET Test
Equation: UNTITLED
Omitted Variables: Squares of fitted values
Specification: LOG_GDP_2 C LOG_GDP_2(-1) LOG_GDP_2(-5)
LOG_GDP_2(-8) LOG_GDP_2(-13)

Value df Probability
t-statistic 1.156320 167 0.2492
F-statistic 1.337076 (1, 167) 0.2492
Likelihood ratio 1.379599 1 0.2402

F-test summary:
Sum of Sq. df Mean Squares
Test SSR 0.000174 1 0.000174
Restricted SSR 0.021860 168 0.000130
Unrestricted SSR 0.021686 167 0.000130

LR test summary:
Value
Restricted LogL 530.9809
Unrestricted LogL 531.6707

Unrestricted Test Equation:

Dependent Variable: LOG_GDP_2
Method: Least Squares
Date: 10/03/23 Time: 23:55
Sample: 1949Q4 1992Q4
Included observations: 173

Variable Coefficient Std. Error t-Statistic Prob.

C -0.000600 0.001026 -0.584964 0.5594

LOG_GDP_2(-1) -0.376397 0.068621 -5.485197 0.0000
LOG_GDP_2(-5) -0.267853 0.067377 -3.975430 0.0001
LOG_GDP_2(-8) -0.179208 0.067366 -2.660202 0.0086
LOG_GDP_2(-13) -0.188572 0.066751 -2.825029 0.0053
FITTED^2 16.25639 14.05873 1.156320 0.2492

R-squared 0.242489 Mean dependent var 5.89E-05

Adjusted R-squared 0.219809 S.D. dependent var 0.012901
S.E. of regression 0.011396 Akaike info criterion -6.077118
Sum squared resid 0.021686 Schwarz criterion -5.967755
Log likelihood 531.6707 Hannan-Quinn criter. -6.032750
F-statistic 10.69178 Durbin-Watson stat 2.166617
Prob(F-statistic) 0.000000
Ramsey RESET Test
Equation: UNTITLED
Omitted Variables: Powers of fitted values from 2 to 3
Specification: LOG_GDP_2 C LOG_GDP_2(-1) LOG_GDP_2(-5)
LOG_GDP_2(-8) LOG_GDP_2(-13)

Value df Probability
F-statistic 2.827663 (2, 166) 0.0620
Likelihood ratio 5.795632 2 0.0551

F-test summary:
Sum of Sq. df Mean Squares
Test SSR 0.000720 2 0.000360
Restricted SSR 0.021860 168 0.000130
Unrestricted SSR 0.021140 166 0.000127

LR test summary:
Value
Restricted LogL 530.9809
Unrestricted LogL 533.8787

Unrestricted Test Equation:

Dependent Variable: LOG_GDP_2
Method: Least Squares
Date: 10/03/23 Time: 23:55
Sample: 1949Q4 1992Q4
Included observations: 173

Variable Coefficient Std. Error t-Statistic Prob.

C -0.000709 0.001017 -0.696668 0.4870

LOG_GDP_2(-1) -0.267599 0.085882 -3.115882 0.0022
LOG_GDP_2(-5) -0.182187 0.078497 -2.320937 0.0215
LOG_GDP_2(-8) -0.120040 0.072569 -1.654155 0.1000
LOG_GDP_2(-13) -0.119586 0.074016 -1.615667 0.1081
FITTED^2 23.34839 14.33688 1.628555 0.1053
FITTED^3 2322.253 1120.947 2.071689 0.0398

R-squared 0.261581 Mean dependent var 5.89E-05

Adjusted R-squared 0.234891 S.D. dependent var 0.012901
S.E. of regression 0.011285 Akaike info criterion -6.091083
Sum squared resid 0.021140 Schwarz criterion -5.963494
Log likelihood 533.8787 Hannan-Quinn criter. -6.039321
F-statistic 9.800764 Durbin-Watson stat 2.179402
Prob(F-statistic) 0.000000
The tables mentioned above are the results of Ramsey Reset Tests where the
first one is for Number of Fitted Terms equal to 1 (means that it includes only
square terms of the variable regressed) and the second one is for Number of
fitted terms equal to 2 (means that it includes both square and cubic terms of the
variable regressed).
Based on above results, we can say that the p-values for both the F-statistic and
the likelihood ratio are greater than 5%, thus we can not reject the null of
“Model not being mis-specified”.

Next, we did CUSUM test to check whether our data has structural breaks or
not.

Graph 1: CUSUM Test

We ran the test on 5% significance interval and found that there are no structural
breaks in the data since the middle data line is not crossing the boundaries for
any time period. Hence we can’t reject the null that there are no structural
breaks.

After this we ran CUSUM Square Test to check for parameter stability.
 Graph 2: CUSUM Square test
Again, we performed our test on 5% significance level. We found that since
lines are crossing the boundaries, hence we can reject the null that there is
parametric stability in our model.