0% found this document useful (0 votes)
120 views3 pages

Slides Lecture 6.4 PDF

1. The document discusses time series analysis and econometrics. It covers evaluating time series data for stationarity, checking for cointegration if variables are non-stationary, estimating autoregressive models if data is stationary, and performing diagnostic tests like testing for serial correlation. 2. Specific tests and methods discussed include the augmented Dickey-Fuller test for stationarity, the Engle-Granger two-step method for cointegration, estimating autoregressive and error correction models, and the Breusch-Godfrey test for serial correlation in residuals. 3. An example application analyzes the stationarity of the log of revenue passenger kilometers for two time series and finds one series appears stationary while the other is

Uploaded by

Javier Dorado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
120 views3 pages

Slides Lecture 6.4 PDF

1. The document discusses time series analysis and econometrics. It covers evaluating time series data for stationarity, checking for cointegration if variables are non-stationary, estimating autoregressive models if data is stationary, and performing diagnostic tests like testing for serial correlation. 2. Specific tests and methods discussed include the augmented Dickey-Fuller test for stationarity, the Engle-Granger two-step method for cointegration, estimating autoregressive and error correction models, and the Breusch-Godfrey test for serial correlation in residuals. 3. An example application analyzes the stationarity of the log of revenue passenger kilometers for two time series and finds one series appears stationary while the other is

Uploaded by

Javier Dorado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

First evaluation step: Check for stationarity

Take difference of time series until stationarity.


MOOC Econometrics Test equation: Augmented Dickey-Fuller
Lecture 6.4 on Time Series: ∆yt = α + βt + ρyt−1 + γ1 ∆yt−1 + . . . + γL ∆yt−L + εt
Evaluation and Illustration Critical value tρb: −2.9 if β = 0, −3.5 if β 6= 0
Dick van Dijk, Philip Hans Franses, Christiaan Heij
For stationary data:
Pp
→ OLS in AR: yt = α + j=1 βj yt−j + εt
Pp
with trend: yt = α + γt + j=1 βj yt−j + εt

→ OLS in ADL: yt = α + pj=1 βj yt−j + rj=1 γj xt−j + εt


P P

with trend: yt = α + δt + pj=1 βj yt−j + rj=1 γj xt−j + εt


P P

t- and F -tests as usual.


Lecture 6.4, Slide 2 of 12, Erasmus School of Economics

Check for cointegration Diagnostic tests

If xt and yt are both non-stationary: check for cointegration. Choice of lag lengths: BIC (see Lecture 3).

Test method: Engle-Granger two-step method Stability check: Chow tests (see Lecture 3).

→ OLS in yt = α + βxt + εt → b and OLS residuals et


Normal residuals: Jarque-Bera (see Lecture 3), critical value: 6.0.
→ OLS in ∆et = α + βt + ρet−1 + γ1 ∆et−1 + . . . + γL ∆et−L + ωt
Critical value tρb: −3.4 if β = 0, −3.8 if β 6= 0 Out-of-sample forecasting: Lecture 6.5.

If xt and yt are cointegrated, estimate ECM: Model should in particular capture autocorrelation in time series.
∆yt = α+βt+γ0 (yt−1 −bxt−1 )+ pj=1 γy ,j ∆yt−j + rj=1 γx,j ∆xt−j +εt
P P → Test if model residuals are uncorrelated: white noise.

(or with β = 0) Two tests: ACF and Breusch-Godfrey.


t- and F -tests as usual. ACF rule-of-thumb: significant if |ACF| > 2/ n.
Lecture 6.4, Slide 3 of 12, Erasmus School of Economics Lecture 6.4, Slide 4 of 12, Erasmus School of Economics
Test question Test on serial correlation: Breusch-Godfrey
Test
Let yt be white noise with variance σ 2 . Show that OLS estimator b in Step 1: Estimate model and get residuals et .
yt = α + βyt−1 + εt gives the first-order autocorrelation of yt . Further
√ √
show that (−2/ n, 2/ n) is approximate 95% confidence interval for β. Step 2: Regress et on all variables of model and r lags of et .
Hint: Use results of Lecture 1.
Answer: Step 3: BG = nR 2 of Step 2, and BG ≈ χ2 (r ) if et white noise.

yt = α = βxt + εt where xt = yt−1 , t = 2, . . . , n, so


Example: Model yt = α + βyt−1 + γxt−1 + εt
b = nt=2 (yt − y )(yt−1 − y )/ nt=2 (yt−1 − y )2
P P

→ Step 1: OLS residuals et = yt − a − byt−1 − cxt−1 .


Pn
var(b) = σ2/ t=2 (yt−1 − where y )2 , → Step 2: OLS in et = α + βyt−1 + γxt−1 + δ1 et−1 + δ2 et−2 + ωt
Pn 2
P n 2 2
t=2 (yt−1 − y ) = (n − 1) t=2 (yt−1 − y ) /(n − 1) ≈ (n − 1)σ , → Step 3: BG = nR 2 ≈ χ2 (2) if et white noise.
var(b) ≈ σ 2 /((n − 1)σ 2 ) = 1/(n − 1) ≈ 1/n
→ Conclusion: Model not correctly specified if BG > 6.0.
√ → Should then adjust model, e.g. more lags of yt and xt .
If n large then b ≈ 0 and SE(b) ≈ 1/ n
√ √
b − 2SE(b) < β < b − 2SE(b) → Lecture
−2/ n < β < 2/ n
6.4, Slide 5 of 12, Erasmus School of Economics Lecture 6.4, Slide 6 of 12, Erasmus School of Economics

Illustration: Revenue Passenger Kilometers (RPK) Tests on stationarity


3.4 Let yt denote log(RPK), either X1t or X2t : trend
X1 = log(RPK1)
3.2
X2 = log(RPK2)
ADF: ∆yt = α + βt + ρyt−1 + γ∆yt−1 + εt
3.0

2.8 t-value of ρb: t = −2.8 for X1 , t = −1.2 for X2


2.6

2.4
Let yt denote either ∆X1t or ∆X2t : no trend
2.2
1975 1980 1985 1990 1995 2000 2005 2010 2015

YEAR ADF: ∆yt = α + ρyt−1 + γ∆yt−1 + εt


DX1 DX2
t-value of ρb: t = −3.3 for X1 , t = −3.7 for X2
.04 .04

Test
.02 .02

.00 .00
What conclusions do you draw from these outcomes?
-.02 -.02
Answer:
1970 1980 1990 2000 2010 2020 1970 1980 1990 2000 2010 2020

YEAR YEA R
As t > −3.5, X1 and X2 not stationary.
Graphs suggest: X1 and X2 non-stationary, ∆X1 and ∆X2 stationary.
As t < −2.9, ∆X1 and ∆X2 are both stationary.
Lecture 6.4, Slide 7 of 12, Erasmus School of Economics Lecture 6.4, Slide 8 of 12, Erasmus School of Economics
Granger causality tests Engle-Granger test and ECM
Step 1: OLS: X2t = 0.01 + 0.92X1t + et .

ADL for ∆X1t ADL for ∆X2t


Step 2: ADF: ∆et = 0.00 − 0.50et−1 + 0.30∆et−1 + rest
Coef. t-Stat. p-value Coef. t-Stat. p-value
→ t-value of coefficient et−1 : t = −3.5 < −3.4
Constant 0.01 1.85 0.07 0.01 2.86 0.01 → et stationary → X1t and X2t cointegrated.
∆X1,t−1 0.87 4.96 0.00 0.18 1.29 0.21
∆X1,t−2 -0.42 -2.02 0.05 0.61 3.68 0.00 ECM (after removing insignificant coefficients):
∆X2,t−1 0.35 1.74 0.09 -0.29 -1.81 0.08
∆X1t = 0.00 + 1.02∆X1,t−1 + 0.46(X2,t−1 − 0.92X1,t−1 ) + e1t
∆X2,t−2 -0.19 -1.27 0.21 -0.13 -1.05 0.30
∆X2t = 0.02 − 0.45(X2,t−1 − 0.92X1,t−1 ) + e2t

Company 1 Granger causal for company 2, not other way round. If Dt−1 = X2,t−1 − 0.92X1,t−1 is positive, then
→ See t-tests (confirmed by F -tests on two coefficients jointly). 0.46 > 0 → X1t ↑ → Dt = X2t − 0.92X1t ↓
−0.45 < 0 → X2t ↓ → Dt = X2t − 0.92X1t ↓

Lecture 6.4, Slide 9 of 12, Erasmus School of Economics Error correction mechanism acts on both variables.
Lecture 6.4, Slide 10 of 12, Erasmus School of Economics

ECM: Check for serial correlation and normality TRAINING EXERCISE 6.4
ECM models for log(RPK) of airline companies 1 and 2 (n = 39):
∆X1t = 0.00 + 1.02∆X1,t−1 + 0.46(X2,t−1 − 0.92X1,t−1 ) + e1t
∆X2t = 0.02 − 0.45(X2,t−1 − 0.92X1,t−1 ) + e2t

Jarque-Bera test: JB1 = 0.4 < 6, JB2 = 1.8 < 6. Train yourself by making the training exercise (see the website).
Breusch-Godfrey test (1 lag): BG1 = 0.3 < 3.9, BG2 = 1.2 < 3.9.
√ √ After making this exercise, check your answers by studying the
ACF: 2/ n = 2/ 39 = 0.32.
.5
ACF e1
webcast solution (also available on the website).
.4 ACF e2
.3

.2

.1

.0

-.1

-.2

-.3
0 2 4 6 8 10

LAG

Lecture 6.4, Slide 11 of 12, Erasmus School of Economics Lecture 6.4, Slide 12 of 12, Erasmus School of Economics

You might also like