Time Series Project

Project of Financial Modeling
Time Series Analysis

Submitted to: Prof. Dr. M. Shahzad Chaudhary
Submitted by: Samar Fatima
Roll No. 12
M.Phil 2nd Semester
Session 2014-2016
Hailey College of Commerce

University of the Punjab
Lahore, Pakistan
Topics to be covered in this Project:

1. Determining whether data is stationary or non
stationary (Graphs+ Dickey Fuller Test)
2. Making data Stationary by taking differences
3. ARMA/ARIMA Processes
Applying different ARIMA Models
Predicting Residuals of Significant ARIMA Models
Making Correlograms of Residuals to determine the
status
Applying wntestq test to determine if Residuals are
white noise or purely random
Only those ARIMA Models are selected whose
Residuals are purely random
Applying AIC (Akike Information Criteria) and BIC (Bayes

Information Criteria) to determine best suited model
4. ARCH/GARCH Effects
Generating Log of concerned variable
Tsline Graphs of first difference of log of variable to see
the element of Volatility Clustering
Applying estat archlm test to determine if there is ARCH
effect
Applying several possible combinations of ARCH/GARCH
Models
Among the significant models, select the best suited
model by using AIC and BIC
5. Cointegration
6. Error Correction Model
7. Vector Autoregression (VAR)
Data Set Used:

The data set used in this project is taken from World Banks
website. GDP, Interest Rate, Inflation Rate, Exports and Imports
of United Kingdom are taken as time series variables.
The URL of data set is given below:
http://data.worldbank.org/country/united-kingdom
United Kingdoms Real Economic Data

From the Year 1960-2014
Year
GDP
1960
7232804704
1961
7669436063
1962
Inflation
Interest
Exports
Imports
14616021507
15617572733
3.376356564
15258543541
15522854822
8060193963
3.717638563
15655395385
15815127026
1963
8544376667
1.972795305
16511191129
16851607900
1964
9338759881
4.0545827
17491172418
19076116871
1965
1.01E+01
4.795834507
18622333929
19509114056
1966
1.07E+01
4.318658684
20082873495
20239775212
1967
1.11E+01
2.887830707 2.53885155
20542668837
21697473493
1968
1.05E+01
4.207110489 1.84045935
21672959116
22507195655
1969
1.13E+01
5.451641531 1.11269815
24206781923
23743551743
1970
1.31E+01
5.028517259 2.11512339
27878329734
26697384209
1971
1.48E+01
8.009560704 -0.47177373
31719396447
29629350207
1972
1.70E+01
7.285111785 0.20029639
34311188811
34335664336
1973
1.93E+01
8.400246767 -0.36923049
42283194512
46458108770
1974
2.06E+01
15.10097432 -5.30054099
54087657784
63546049556
1975
2.42E+01
25.86753593 -12.3119138
60079424779
63813938053
1976
2.33E+01
14.98165176 -3.23637296
63747529200
65990116801
1977
2.63E+01
13.55698375 -4.34317959
76362986220
74203035060
1978
3.36E+01
11.53637776 -2.04989421
92052540748
87309875360
1979
4.39E+01
14.14623841 -0.20112072
1.18E+11
1.15E+11
1980
5.65E+01
19.87267505 -3.09162065
1.47E+11
1.34E+11
1981
5.41E+01
11.63626691 1.44552763
1.37E+11
1.22E+11
1982
5.15E+01
7.333900565 4.1628812
1.29E+11
1.19E+11
1983
4.90E+01
5.142602267 4.42167522
1.23E+11
1.18E+11
1984
4.61E+01
5.041399827 4.41319662
1.24E+11
1.24E+11
1985
4.89E+01
6.125405712 5.84961497
1.34E+11
1.28E+11
1986
6.01E+01
4.325113396 6.23840197
1.46E+11
1.49E+11
1987
7.45E+01
5.287254429 4.11991517
1.78E+11
1.84E+11
1988
9.10E+01
5.931141743 4.11637678
1.95E+11
2.23E+11
1989
9.27E+01
7.998681777 5.47968252
2.03E+11
2.35E+11
1990
1.09E+01
8.097270912 6.15439134
2.47E+11
2.65E+11
1991
1.14E+12
6.562613091 4.67242068
2.50E+11
2.53E+11
1992
1.18E+01
3.273786589 5.94815033
2.62E+11
2.69E+11
1993
1.06E+01
2.577153491 3.25561108
2.55E+11
2.58E+11
1994
1.14E+01
1.219196462 4.20865839
2.88E+11
2.87E+11
1995
1.24E+01
2.47712814
4.10859665
3.36E+11
3.30E+11
1996
1.30E+01
4.021771216 1.86168923
3.62E+11
3.58E+11
1997
1.44E+01
2.477579555 4.0064898
3.92E+11
3.85E+11
1998
1.53E+01
1.501940304 5.62195462
3.88E+11
3.99E+11
1999
1.56E+01
1.134752464 4.15147193
3.92E+11
4.17E+11
2000
1.55E+01
2.402651951 3.4925997
4.07E+11
4.38E+11
2001
1.53E+01
1.092343041 3.94786605
4.00E+11
4.36E+11
2002
1.67E+01
2.651753607 1.31341779
4.21E+11
4.66E+11
2003
1.94E+01
2.17219149
1.48309289
4.80E+11
5.24E+11
2004
2.30E+01
2.906510022 1.44725859
5.60E+11
6.25E+11
2005
2.41E+01
2.808504841 1.78713667
6.21E+11
6.84E+11
2006
2.58E+01
2.685238376 1.90932502
7.18E+11
7.79E+11
2007
2.96E+12
2.872734219 2.5741506
7.60E+11
8.41E+11
2008
2.79E+01
2.888570847 1.68767933
7.74E+11
8.56E+11
2009
2.31E+12
1.990987494 -1.33932176
6.24E+11
6.67E+11
2010
2.41E+01
3.170637205 -2.58856325
6.91E+11
7.48E+11
2011
2.59E+01
2.125945212 -1.59209807
8.00E+11
8.38E+11
2012
2.61E+01
1.660953748 -1.14198589
7.91E+11
8.45E+11
2013
2.68E+01
1.79333911
-1.27055377
8.07E+11
8.59E+11
2014
2.94E+01
1.765220456 -1.24327393
8.34E+11
8.88E+11
1. Determining whether data is stationary or non

stationary (Graphs+ Dickey Fuller Test):
For forecasting purpose It is necessary that data is stationary, if data is non-stationary
but treated as stationary, it does not give the appropriate anticipation or prediction.
1st Variable GDP:

Correlogram of GDP:
. corrgram GDP
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
AC
0.9416
0.8860
0.8339
0.7793
0.7294
0.6876
0.6271
0.5533
0.4877
0.4234
0.3590
0.3070
0.2642
0.2264
0.1876
0.1460
0.0990
0.0512
0.0086
-0.0311
-0.0660
-0.0968
-0.1320
-0.1672
-0.2042
PAC
1.0214
-0.2750
0.3845
-0.2534
0.2895
0.4064
0.3285
0.1787
-0.5248
-0.0197
0.4992
1.0547
-0.1833
0.2402
0.7376
-0.4961
-1.0587
-0.6519
-0.4099
-0.8236
-1.0040
-0.3424
-0.6789
0.9657
0.9129
Prob>Q
51.476
97.914
139.84
177.17
210.53
240.78
266.46
286.88
303.09
315.58
324.76
331.64
336.84
340.76
343.52
345.24
346.05
346.27
346.27
346.36
346.76
347.65
349.36
352.19
356.54
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
-1
0
1 -1
0
1
[Autocorrelation] [Partial Autocor]
The correlogram shows GDP is non stationary because 1st PAC is

significantly different from zero. Further verification will be made by dickey
fuller test as follows:
. dfuller GDP
Dickey-Fuller test for unit root
Test
Statistic
Z(t)
1.136
Number of obs
-3.574
H0: Data is non stationary

H1: Data is stationary
As p> so accept H0 and concluded that data is non stationary
Correlogram of Inflation Rate
54
Interpolated Dickey-Fuller
1% Critical
5% Critical
10% Critical
Value
Value
Value
MacKinnon approximate p-value for Z(t) = 0.9955
2nd Variable Inflation Rate:
-2.927
-2.598
. corrgram Inflation
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
AC
PAC
0.8103
0.6364
0.5353
0.5060
0.4842
0.3359
0.1772
0.0923
0.0862
0.0602
-0.0035
-0.0786
-0.0913
-0.0779
-0.0521
-0.0933
-0.1794
-0.2215
-0.2361
-0.2144
-0.2163
-0.2372
-0.2586
-0.2531
-0.2211
0.8198
-0.0560
0.1283
0.1556
0.0458
-0.3253
-0.1152
0.0236
0.0858
-0.0767
0.0164
-0.0076
0.0493
-0.0722
0.0345
-0.0973
-0.1710
0.0385
0.0003
0.0315
-0.0129
-0.0459
-0.0825
-0.0366
0.0067
Prob>Q
37.467
61.02
78.013
93.498
107.97
115.07
117.09
117.65
118.15
118.4
118.4
118.85
119.46
119.92
120.13
120.82
123.45
127.57
132.39
136.48
140.77
146.08
152.61
159.06
164.16
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
-1
0
1 -1
0
1
. dfuller Inflation
Test
Statistic
Z(t)
-2.222
Number of obs
53
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.576
-2.928
-2.599

.
Both the graph and dickey fuller proves that Inflation Rate is non stationary data
3rd Variable Interest Rate:

. corrgram Interest
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
AC
PAC
0.7708
0.6299
0.5470
0.3957
0.2925
0.1868
0.0414
-0.0438
-0.0802
-0.1808
-0.2282
-0.2272
-0.2184
-0.2489
-0.2613
-0.2229
-0.2632
-0.2471
-0.2542
-0.2778
-0.2485
-0.2373
0.7807
0.0970
0.0975
-0.1670
0.0005
-0.0995
-0.2031
-0.0708
-0.0090
-0.1636
-0.0292
0.0533
0.0988
-0.2386
-0.0470
0.1496
-0.1832
0.0296
-0.2267
-0.2277
0.0296
-0.1698
Prob>Q
30.336
51.041
67.001
75.542
80.317
82.311
82.411
82.526
82.922
84.986
88.366
91.807
95.079
99.452
104.42
108.15
113.51
118.39
123.74
130.36
135.85
141.04
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
-1
0
1 -1
0
1
. dfuller Interest
Test
Statistic
Z(t)
-2.322
Number of obs
47
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.600
-2.938
-2.604

.
Both the graph and dickey fuller proves that Interest Rate is non stationary data
4th Variable Exports:

. corrgram Exports
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
AC
PAC
0.9391
0.8764
0.8158
0.7512
0.7002
0.6577
0.5904
0.5193
0.4483
0.3879
0.3326
0.2854
0.2458
0.2090
0.1704
0.1321
0.0893
0.0433
0.0006
-0.0374
-0.0683
-0.0963
-0.1254
-0.1543
-0.1846
1.0267
-0.1029
0.2770
0.0719
0.1404
0.1915
1.3087
0.0574
0.3157
0.8277
0.1116
-0.5963
1.2380
0.5406
1.2100
1.4790
-2.0561
1.1139
-0.1449
0.3748
-1.2617
0.9287
1.6289
0.0836
2.1637
Prob>Q
51.197
96.631
136.76
171.45
202.18
229.86
252.62
270.61
284.31
294.8
302.68
308.61
313.13
316.46
318.74
320.14
320.8
320.96
320.96
321.09
321.52
322.4
323.94
326.34
329.9
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
-1
0
1 -1
0
1
. dfuller Exports
Test
Statistic
Z(t)
1.433
Number of obs
54
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.574
-2.927
-2.598

.
Both the graph and dickey fuller proves that Exports are non stationary data
5th Variable Imports:

. corrgram Imports
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
AC
PAC
0.9405
0.8795
0.8197
0.7587
0.7062
0.6645
0.5939
0.5196
0.4473
0.3836
0.3244
0.2757
0.2333
0.1948
0.1561
0.1180
0.0775
0.0367
-0.0033
-0.0391
-0.0695
-0.0967
-0.1257
-0.1538
-0.1853
1.0251
-0.0758
0.2207
0.0914
0.0278
0.2630
0.9520
0.0693
-0.4979
0.6857
0.4584
-0.3233
0.7734
1.5048
1.6361
1.9199
-1.6333
1.2650
-1.1975
0.9145
-1.2578
0.1766
0.2289
-1.7670
0.7887
Prob>Q
51.353
97.107
137.62
173
204.27
232.51
255.55
273.56
287.19
297.45
304.94
310.49
314.55
317.45
319.36
320.48
320.97
321.09
321.09
321.23
321.67
322.56
324.11
326.5
330.09
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
-1
0
1 -1
0
1
. dfuller Imports
Test
Statistic
Z(t)
1.303
Number of obs
54
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.574
-2.927
-2.598

.
Both the graph and dickey fuller proves that Imports are non stationary data
1. Making data Stationary by taking differences

1st Variable GDP:
1st difference of GDP is created by following command:
Gen diffGDP=D1.GDP
After creating first difference of GDP, its stationairty is checked by
correlogram and dickey fuller test
. corrgram diffGDP
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
AC
PAC
0.2795
-0.2191
0.0338
-0.0035
-0.3910
-0.2143
0.1565
0.2162
0.1464
0.1124
-0.0300
-0.0156
-0.0638
-0.1027
0.0482
0.2257
0.1492
-0.0185
-0.0114
-0.0102
-0.1859
-0.1651
-0.0702
0.0661
0.0482
0.2959
-0.3468
0.2805
-0.2571
-0.3462
-0.0038
0.2308
0.6267
0.1031
-0.2371
-0.6602
0.6018
0.1375
-0.2758
0.9762
1.2009
0.7038
0.3921
0.7875
1.0137
0.3182
0.6988
-0.8274
0.8594
2.7460
Prob>Q
4.4588
7.2508
7.3186
7.3194
16.753
19.648
21.224
24.297
25.738
26.606
26.67
26.687
26.988
27.785
27.965
32.02
33.838
33.867
33.878
33.887
37.053
39.631
40.112
40.552
40.794
0.0347
0.0266
0.0624
0.1199
0.0050
0.0032
0.0035
0.0020
0.0023
0.0030
0.0052
0.0086
0.0125
0.0152
0.0218
0.0099
0.0088
0.0131
0.0190
0.0269
0.0166
0.0119
0.0149
0.0186
0.0241
-1
0
1 -1
0
1
. *seems it became stationary, lets confirm by applying the test
. dfuller diffGDP
Test
Statistic
Z(t)
-5.113
Number of obs
53
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.576
-2.928
-2.599
Hence it is concluded that GDP becomes stationary at first difference

1st difference of Inflation Rate is created by following command:
Gen diffInflation=D1.Inflation
After creating first difference of Inflation Rate, its stationairty is checked by
. corrgram diffInflation
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
.
AC
PAC
-0.0415
-0.2096
-0.1837
-0.0089
0.3358
0.0289
-0.1968
-0.2122
0.0532
0.1183
0.0217
-0.1627
-0.0535
0.0259
0.1214
0.1189
-0.1233
-0.0513
-0.0863
0.0151
0.0424
-0.0037
-0.0476
-0.0554
-0.0415
-0.2116
-0.2111
-0.0887
0.2684
0.0301
-0.1069
-0.1545
0.0095
-0.0780
-0.0520
-0.1011
0.0198
-0.0863
0.0662
0.1140
-0.1267
-0.0742
-0.1116
-0.0001
0.0363
0.0448
-0.0311
-0.0976
Prob>Q
.09633
2.6073
4.5737
4.5784
11.426
11.478
13.932
16.848
17.035
17.985
18.017
19.9
20.109
20.159
21.289
22.402
23.633
23.852
24.49
24.51
24.674
24.675
24.896
25.204
0.7563
0.2715
0.2058
0.3334
0.0436
0.0747
0.0524
0.0317
0.0482
0.0552
0.0812
0.0690
0.0925
0.1252
0.1279
0.1307
0.1298
0.1599
0.1780
0.2208
0.2616
0.3129
0.3557
0.3947
-1
0
1 -1
0
1
dfuller diffInflation
Test
Statistic
Z(t)
-7.372
Number of obs
52
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.577
-2.928

.
Hence it is proved Inflation Rate is Stationary at first difference
-2.599

1st difference of Interest Rate is created by following command:
Gen diffInterest=D1.Interest
After creating first difference of Interest Rate, its stationairty is checked by
. corrgram diffInterest
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
AC
PAC
-0.1977
-0.1270
0.1444
-0.1090
0.0151
0.1228
-0.1047
-0.0850
0.1088
-0.1173
-0.1172
-0.0263
0.1284
-0.0629
-0.1191
0.1914
-0.1439
0.0231
0.0573
-0.1102
0.0303
-0.1977
-0.1733
0.0873
-0.0894
0.0098
0.0999
-0.0533
-0.1470
0.0812
-0.0886
-0.1232
-0.1504
0.1982
0.0143
-0.1257
0.2039
-0.0106
0.2430
0.2395
-0.0665
0.1762
Prob>Q
1.9567
2.7826
3.8743
4.511
4.5235
5.3701
6.0013
6.4283
7.1461
8.0025
8.8808
8.9262
10.043
10.319
11.339
14.06
15.65
15.693
15.963
16.999
17.08
0.1619
0.2487
0.2754
0.3412
0.4767
0.4973
0.5396
0.5994
0.6219
0.6286
0.6329
0.7092
0.6904
0.7385
0.7282
0.5942
0.5487
0.6140
0.6598
0.6530
0.7062
-1
0
1 -1
0
1
. dfuller diffInterest
Test
Statistic
Z(t)
-8.111
Number of obs
46
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.607
-2.941
-2.605

.
Hence it is proved Interest Rate is stationary at first difference

1st difference of Exports is created by following command:
Gen diffExports=D1.Exports
After creating first difference of Exports, its stationairty is checked by
. corrgram diffExports
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
AC
PAC
0.1525
-0.1758
-0.0351
-0.0103
-0.0750
-0.0428
0.1365
0.1670
0.0640
0.0929
0.0896
-0.0576
-0.0756
-0.0507
0.0117
0.1777
0.0615
0.0120
-0.0635
0.0138
-0.0269
-0.1379
-0.0432
-0.0010
-0.0070
0.1530
-0.2038
0.0289
-0.0529
-0.0920
-0.0396
0.8448
0.4080
-0.0925
0.6338
1.0273
-0.7498
0.2042
-0.0813
0.2848
2.6551
-0.5527
0.7761
0.1192
1.3520
-0.6800
-1.3506
0.3016
0.1562
1.1526
Prob>Q
1.3275
3.1244
3.1976
3.204
3.5514
3.6667
4.8659
6.6983
6.9732
7.5661
8.1308
8.3697
8.791
8.9855
8.9961
11.509
11.818
11.83
12.178
12.195
12.261
14.057
14.239
14.239
14.245
0.2493
0.2097
0.3621
0.5243
0.6156
0.7217
0.6763
0.5695
0.6399
0.6711
0.7015
0.7556
0.7885
0.8320
0.8777
0.7771
0.8111
0.8559
0.8779
0.9092
0.9323
0.8994
0.9198
0.9411
0.9573
-1
0
1 -1
0
1
. dfuller diffExports
Test
Statistic
Z(t)
-6.124
Number of obs
53
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.576
-2.928
-2.599

.
Hence it is proved that Exports are Stationary at first difference

1st difference of Imports is created by following command:
Gen diffImports=D1.Imports
After creating first difference of Imports, its stationairty is checked by
. corrgram diffImports
LAG
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
AC
PAC
0.1214
-0.1397
-0.0467
0.0483
-0.1415
0.0027
0.1295
0.1820
0.0643
0.0625
0.0335
-0.0161
-0.0733
-0.0668
0.0011
0.1543
0.0377
0.0832
-0.0367
-0.0043
-0.0945
-0.0949
-0.0423
0.0120
-0.0182
0.1216
-0.1567
-0.0090
0.0414
-0.1867
0.2249
0.6608
0.7817
-0.2677
0.0704
0.6565
-0.2908
-0.6215
-0.4045
0.0960
2.8750
-0.1996
2.2495
-0.2949
1.8458
-0.0235
-0.1873
1.7562
-1.1003
-0.6959
Prob>Q
.84023
1.9751
2.1043
2.2454
3.4814
3.4819
4.5602
6.7385
7.0161
7.2844
7.3633
7.382
7.7781
8.1157
8.1158
10.01
10.126
10.707
10.824
10.825
11.643
12.494
12.669
12.683
12.718
0.3593
0.3725
0.5510
0.6907
0.6262
0.7464
0.7135
0.5651
0.6354
0.6984
0.7689
0.8314
0.8578
0.8832
0.9191
0.8661
0.8983
0.9064
0.9296
0.9506
0.9488
0.9463
0.9588
0.9711
0.9798
-1
0
1 -1
0
1
. dfuller diffImports
Test
Statistic
Z(t)
-6.324
Number of obs
53
1% Critical
5% Critical
10% Critical
Value
Value
Value
-3.576
-2.928
-2.599

.
Hence it is proved that Imports are Stationary at first difference
3. ARIMA Processes
1st variable GDP:
Applying different ARIMA Models
ARIMA (0,1,1) Model
. arima GDP, arima(0,1,1)

ARIMA regression
Sample:
1961 - 2014
Number of obs
Wald chi2(1)
Prob > chi2
Log likelihood = -1450.048
OPG
Std. Err.
P>|z|
=
=
=
54
65.46
0.0000
D.GDP
Coef.
[95% Conf. Interval]
_cons
5.49e+10
ma
L1.
.5805577
.0717584
8.09
0.000
.4399138
.7212017
/sigma
1.11e+11
GDP
ARMA
Note: The test of the variance against zero is one sided, and the two-sided confidence interval is
truncated at zero.
ARIMA (2,1,0) Model
. arima GDP, arima(2,1,0)

ARIMA regression
Sample:
1961 - 2014
Number of obs
Wald chi2(2)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
54
43.21
0.0000
D.GDP
Coef.
_cons
5.36e+10
ar
L1.
L2.
.3899978
-.3355386
.0711511
.0846288
5.48
-3.96
0.000
0.000
.2505442
-.5014079
.5294514
-.1696692
/sigma
1.12e+11
GDP
ARMA
truncated at zero.
Predicting Residuals of Significant ARIMA Models:

After getting the significant models the next step is to predict their residuals and
then apply the wntestQ test to determine whether the error terms of selected
ARIMA model is purely random or white noise. Only those models will be
considered right whose error term shows purely random process. The residuals
are predicted by following command:
Predict e, residuals
Further test applied on error terms of above mentioned significant models is

given below as:
wntestq e ARIMA (0,1,1)

. wntestq e3
Portmanteau test for white noise
Portmanteau (Q) statistic =
Prob > chi2(25)
=
28.0345
0.3063
wntestq e2 AIMA (2,1,0)

. predict e2, residuals
(1 missing value generated)
. wntestq e2
Prob > chi2(25)
=
27.9104
0.3120
Applying AIC (Akike Information Criteria) and BIC (Bayes

Information Criteria) to determine best suited model:
Thus both the models are satisfying the condition of ARIMA Modeling. Now the
best suited model will be determined by AIC and BIC
ARIMA (0,1,1)
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
54
-1450.048
2902.096
2904.085
Note:
N=Obs used in calculating BIC; see [R] BIC note
ARIMA (2,1,0)
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
54
-1450.428
2904.855
2908.833
Note:
Conclusion: The best suited model for GDP is ARIMA (0,1,1) according to AIC and
BIC , because it is showing lesser differences. It is MA Model integrated at first
difference.

1st Model ARIMA (1,2,2)
. arima Inflation, arima(1,2,2)
ARIMA regression
Sample:
1963 - 2014
Number of obs
Wald chi2(3)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
52
13580.06
0.0000
D2.Inflation
Coef.
Inflation
_cons
-.014696
.0328942
-0.45
0.655
-.0791673
.0497754
ar
L1.
.8209976
.3715876
2.21
0.027
.0926993
1.549296
ma
L1.
L2.
-1.998521
.9999981
.3603057
.4027015
-5.55
2.48
0.000
0.013
-2.704707
.2107176
-1.292335
1.789278
/sigma
2.881749
ARMA
After predicting the residuals, by applying wntestq test:

. predict e, residuals
(3 missing values generated)
. wntestq e
Prob > chi2(24)
=
23.7218
0.4776
Applying AIC and BIC:

. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
52
-132.6454
273.2907
281.0957
Note:
2nd Model ARIMA (0, 2, 1)
ARIMA regression
Sample:
1963 - 2014
Number of obs
Wald chi2(1)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
52
87.48
0.0000
D2.Inflation
Coef.
Inflation
_cons
-.0134573
.0491316
-0.27
0.784
-.1097535
.0828389
ma
L1.
-.9999992
.1069159
-9.35
0.000
-1.20955
-.790448
/sigma
3.042764
ARMA
truncated at zero.

. wntestq e2
Prob > chi2(24)
=
26.1842
0.3439

. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
52
-133.6337
271.2674
275.1699
Note:
Conclusion: According to Akike and Bayes Information Criteria the best suited
ARIMA Model for second variable Inflation Rate is (0,2,1). It is a moving average
term integrated at second difference.

1st Model ARIMA (1,1,1)
ARIMA regression
Sample:
1968 - 2014
Number of obs
Wald chi2(2)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
47
173.23
0.0000
D.Interest
Coef.
Interest
_cons
-.0088936
.1436402
-0.06
0.951
-.2904231
.2726359
ar
L1.
.8034576
.0640125
12.55
0.000
.6779953
.9289199
ma
L1.
-1.000001
.1367714
-7.31
0.000
-1.268068
-.7319339
/sigma
2.259345
ARMA
truncated at zero.
.

. wntestq e
Prob > chi2(21)
=
14.3233
0.8553
Hence result of white noise test is showing that p <, thus H0 is accepting here
that states errors are not white noise, thus this model disqualifies due to the
reason its errors are not purely random.
2nd Model ARIMA (0,1,1)

ARIMA regression
Sample:
1968 - 2014
Number of obs
Wald chi2(1)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
47
9.42
0.0021
D.Interest
Coef.
Interest
_cons
-.0771925
.3187205
-0.24
0.809
-.7018733
.5474882
ma
L1.
-.2485257
.0809822
-3.07
0.002
-.4072479
-.0898035
/sigma
2.323684
.1533554
15.15
0.000
2.023113
2.624255
ARMA
truncated at zero.

. wntestq e2
Prob > chi2(21)
=
11.3399
0.9558
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
47
-106.3503
218.7005
224.251
Note:
Conclusion: among the two significant ARIMA Models, one of the Model ARIMA
1,1,1 does not follow the requirement of random errors, hence best fitted
model is ARIMA 0,1,1 i.e MA term integrated at first difference.

1st Model ARIMA 1,1,0
ARIMA regression
Sample:
1961 - 2014
Number of obs
Wald chi2(1)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
54
3.70
0.0543
D.Exports
Coef.
Exports
_cons
1.52e+10
ar
L1.
.1506258
.0782622
1.92
0.054
-.0027653
.3040169
/sigma
3.42e+10
1.40e+09
24.44
0.000
3.14e+10
3.69e+10
ARMA
truncated at zero.
.
(1 missing value generated)
. wntestq e
Prob > chi2(25)
=
11.8412
0.9878

. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
54
-1386.395
2776.789
2780.767
Note:
2nd Model ARIMA 0,1,1

ARIMA regression
Sample:
1961 - 2014
Number of obs
Wald chi2(1)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
54
13.29
0.0003
D.Exports
Coef.
Exports
_cons
1.52e+10
ma
L1.
.2337091
.0641074
3.65
0.000
.1080609
.3593572
/sigma
3.39e+10
1.38e+09
24.57
0.000
3.12e+10
3.66e+10
ARMA
truncated at zero.
.
. wntestq e2
Prob > chi2(25)
=
10.5415
0.9949

. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
54
-1386.027
2776.054
2780.032
Note:
Conclusion: According to AIC and BIC the best suited model for Exports is
ARIMA (0,1,1), in other words it is a moving average term integrated at first
difference.

1st Model ARIMA 0,1,1
ARIMA regression
Sample:
1961 - 2014
Number of obs
Wald chi2(1)
Prob > chi2
D.Imports
OPG
Std. Err.
Coef.
P>|z|
=
=
=
54
5.92
0.0150
Imports
_cons
1.61e+10
ma
L1.
.1628361
.066913
2.43
0.015
.031689
.2939833
/sigma
3.82e+10
1.32e+09
28.98
0.000
3.56e+10
4.08e+10
ARMA
truncated at zero.

. wntestq e
Prob > chi2(25)
=
10.4811
0.9951

. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
54
-1392.427
2788.854
2792.832
Note:
2nd Model ARIMA 0,2,1
ARIMA regression
Sample:
1962 - 2014
Number of obs
Wald chi2(1)
Prob > chi2
=
=
=
53
119.45
0.0000
OPG
Std. Err.
P>|z|
6.70e+08
3.46e+08
1.93
0.053
-8734125
1.35e+09
ma
L1.
-.999991
.0914948
-10.93
0.000
-1.179317
-.8206644
/sigma
3.75e+10
D2.Imports
Coef.
Imports
_cons
ARMA
truncated at zero.

. wntestq e2
Prob > chi2(24)
=
13.7425
0.9523
Applying AIC and BIC

. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
53
-1367.656
2739.312
2743.252
Note:
Conclusion: in both the cases it is a MA term, no AR term came significant in

either model. According to AIC and BIC the best suited model is ARIMA 0,2,1. A
moving average term integrated at second difference.
4. ARCH/GARCH Effects
1st Variable GDP:
Generating Log of concerned variable by following command
gen ln_GDP=GDP
the element of Volatility Clustering by the following
command:
-4.00e+11 -2.00e+11D.ln_GDP
2.00e+11 4.00e+11
tsline D.ln_GDP
1960
1980
2000
Year
2020
The graph is showing the arch effect but it will be verified by the
appropriate test i.e
Regress D.ln_GDP
. regress D.ln_GDP
Source
SS
df
MS
Model
Residual
0
8.2704e+23
0
53
.
1.5605e+22
Total
8.2704e+23
53
1.5605e+22
D.ln_GDP
Coef.
_cons
5.31e+10
Std. Err.
1.70e+10
t
3.13
Number of obs
F( 0,
53)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
54
0.00
.
0.0000
0.0000
1.2e+11
P>|t|
0.003
1.90e+10
8.72e+10
The test to determine the squared residuals heteroscadastic variance

the command is one of the post estimation test like this:
estat archlm, lags()
. estat archlm, lags(2)
LM test for autoregressive conditional heteroskedasticity (ARCH)
lags(p)
chi2
df
Prob > chi2
4.777
0.0918
H0: no ARCH effects
vs.
H1: ARCH(p) disturbance
The numbers of lags is determined according to the following

formula:
[12*(n/100)^1/4]
Thus according to the results H0 is rejected here, so we conclude

GDP is having volatility clustering that is arch effect in it. Now
appropriate model will be selected by using other formulas.
1st proposed arch model is
Arch D.ln_GDP, arch(1)
ARCH family regression
Sample: 1961 - 2014
Distribution: Gaussian
D.ln_GDP
Coef.
Number of obs
Wald chi2(.)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
54
.
.
ln_GDP
_cons
1.66e+10
arch
L1.
1.679375
.477225
3.52
0.000
.7440308
2.614719
_cons
2.75e+21
ARCH
estat ic
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
54
-1442.601
2887.203
2889.192
Note:
2nd proposed arch model:
arch D.ln_GDP, arch(2)

Sample: 1961 - 2014
D.ln_GDP
Coef.
Number of obs
Wald chi2(.)
Prob > chi2
OPG
Std. Err.
P>|z|
=
=
=
54
.
.
ln_GDP
_cons
3.91e+10
arch
L2.
.8777948
.2761661
3.18
0.001
.3365192
1.41907
_cons
6.10e+21
ARCH
Estat ic:
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
54
-1447.882
2897.763
2899.752
Note:
Conclusion: according to AIC and BIC the best suited ARCH model for
GDP is ARCH (1).
Generating Log of concerned variable by following command
gen ln_Inflation=Inflation

the element of Volatility Clustering by the following
command:
-10
-5
D.ln_Inflation
10
tsline D.ln_Inflation
1960
1980
2000
2020
Year
The graph is showing data has volatility clustering, but it will be proved
by proper tests.
Regress D.ln_Inflation
. regress D.ln_Inflation
Source
SS
df
Model
Residual
0
483.68159
0
52
.
9.30156903
Total
483.68159
52
9.30156903
D.
ln_Inflation
Coef.
_cons
-.0303988
MS
Std. Err.
.4189288
Number of obs
F( 0,
52)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
-0.07
0.942
=
=
=
=
=
=
53
0.00
.
0.0000
0.0000
3.0498

-.8710408
.8102433
Estat archlm, lags(2)

*lags are decided according to the formula
[12*(n/100)^1/4]
lags(p)
chi2
df
Prob > chi2
23.004
0.0000
H0: no ARCH effects
vs. H1: ARCH(p) disturbance
As p is less than alpha so H0 is rejected and it is concluded that data is

having arch effect in its residuals.
Arch D.ln_Inflation, arch(1)

Sample: 1962 - 2014
Number of obs
Wald chi2(.)
Prob > chi2
OPG
Std. Err.
=
=
=
53
.
.
D.
ln_Inflation
Coef.
ln_Inflation
_cons
-.0746097
.23802
-0.31
0.754
-.5411203
.3919008
arch
L1.
.983249
.4886243
2.01
0.044
.0255629
1.940935
_cons
1.694972
.6215302
2.73
0.006
.4767949
2.913148
P>|z|
ARCH
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
53
-114.0302
234.0603
239.9712
Note: N=Obs used in calculating BIC; see [R] BIC note
2nd proposed model

Arch D.ln_Inflation, arch(1) garch(1)
Sample: 1962 - 2014
Number of obs
Wald chi2(.)
Prob > chi2
OPG
Std. Err.
=
=
=
53
.
.
D.
ln_Inflation
Coef.
ln_Inflation
_cons
-.0707637
.2041075
-0.35
0.729
-.4708069
.3292796
arch
L1.
.7834474
.4357573
1.80
0.072
-.0706211
1.637516
garch
L1.
.4497701
.2088906
2.15
0.031
.0403521
.8591881
_cons
.157091
.3021076
0.52
0.603
-.435029
.7492109
P>|z|
ARCH
Estat ic
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
53
-114.2315
236.463
244.3442
Conclusion: According to AIC and BIC the best fitted arch/garch model
is Arch[1] model because of lesser values of AIC and BIC.
Interpretation: for every one unit change in year there will be .9824
unit chances of change in data clustering in the same direction.
3rd variable Interest Rate:
Tsline D.ln_Interest
10
5
-10
-5
D.ln_interest
1960
1980
2000
2020
Year
Graph is showing data can have volatility clustering but further tests are required
to validate.
Regress D.ln_interest
. regress D.ln_interest
Source
SS
df
MS
Model
Residual
0
267.657578
0
46
.
5.818643
Total
267.657578
46
5.818643
D.
ln_interest
Coef.
_cons
-.0804707
Std. Err.
.3518535
t
-0.23
Number of obs
F( 0,
46)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
0.820
=
47
=
0.00
=
.
= 0.0000
= 0.0000
= 2.4122

-.7887152
.6277737

lags(p)
chi2
df
Prob > chi2
9.427
0.0021
H0: no ARCH effects
vs.
H1: ARCH(p) disturbance
H0 is rejected here and concluded that data have arch effects in it.
1st proposed model for Interest Rate
Arch D.ln_interest, arch(1)
Sample: 1968 - 2014
Number of obs
Wald chi2(.)
Prob > chi2
OPG
Std. Err.
=
=
=
47
.
.
D.
ln_interest
Coef.
ln_interest
_cons
-.1418719
.2965876
-0.48
0.632
-.7231729
.4394292
arch
L1.
.50474
.2833284
1.78
0.075
-.0505734
1.060053
_cons
2.302034
.5702961
4.04
0.000
1.184274
3.419794
P>|z|
ARCH
Estat ic
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
47
-98.06024
202.1205
207.6709
Note:
2nd proposed model

Arch D.ln_interest, ar(1) arch(1)
ARCH family regression -- AR disturbances
Sample: 1968 - 2014
Number of obs
Wald chi2(1)
Prob > chi2
OPG
Std. Err.
=
=
=
47
1.04
0.3075
D.
ln_interest
Coef.
ln_interest
_cons
-.1583056
.2678106
-0.59
0.554
-.6832048
.3665936
ar
L1.
-.1733027
.1698164
-1.02
0.307
-.5061367
.1595313
arch
L1.
.4564087
.2564416
1.78
0.075
-.0462076
.959025
_cons
2.355003
.5656965
4.16
0.000
1.246258
3.463748
P>|z|
ARMA
ARCH
. estat ic
Model
Obs
ll(null)
ll(model)
df
AIC
BIC
47
-97.63469
203.2694
210.67
Interpretation:
The best suited arch model for Interest rate is arch (1) model as it contains
lesser values of AIC and BIC. For every one unit change in year there will be
.5047 units chances of change in interest rate in the same direction.
0
-1.50e+11-1.00e+11-5.00e+10
D.ln_exports
5.00e+10 1.00e+11
Tsline D.ln_exports
1960
1980
2000
2020
Year
Regress D. ln_exports
. regress D.ln_exports
Source
SS
MS
Model
Residual
0
6.4587e+22
0
.
53 1.2186e+21
Total
6.4587e+22
53 1.2186e+21
D.ln_exports
Coef.
_cons
1.52e+10
df
Number of obs
F( 0,
53)
Prob > F
R-squared
Adj R-squared
Root MSE
=
54
=
0.00
=
.
= 0.0000
= 0.0000
= 3.5e+10
Std. Err.
P>|t|
4.75e+09
3.19
0.002
5.65e+09
2.47e+10

lags(p)
chi2
df
Prob > chi2
3.864
0.1449
H0: no ARCH effects
Conclusion: H0 is accepted here and it is concluded that Exports do

not show sudden changes or volatility clustering in it.
-1.00e+11
-2.00e+11
D.ln_imports
1.00e+11
Tsline D.ln_imports
1960
1980
2000
Year
2020
Regress D.ln_imports
. regress D.ln_imports
Source
SS
df
MS
Model
Residual
0
8.0518e+22
0
.
53 1.5192e+21
Total
8.0518e+22
53 1.5192e+21
D.ln_imports
Coef.
_cons
1.61e+10
Number of obs
F( 0,
53)
Prob > F
R-squared
Adj R-squared
Root MSE
=
54
=
0.00
=
.
= 0.0000
= 0.0000
= 3.9e+10
Std. Err.
P>|t|
5.30e+09
3.04
0.004
5.51e+09
2.68e+10

lags(p)
chi2
df
Prob > chi2
1.226
0.5416
H0: no ARCH effects
Conclusion:
H0 is accepted here and concluded that imports do not have the arch effect or
volatility clustering in it.
5. Cointegration:
1st pair GDP and Inflation:
1.000e+12
2.000e+12
3.000e+12
Tsline GDP Inflation:
1960
1980
2000
Year
GDP (Current US$)
Run Spurious Regression :
Inflation Rate
2020
. regress GDP Inflation

Source
SS
df
MS
Model
Residual
1.0609e+25
3.5728e+25
1
52
1.0609e+25
6.8707e+23
Total
4.6337e+25
53
8.7429e+23
GDP
Coef.
Inflation
_cons
-8.93e+10
1.57e+12
Std. Err.
2.27e+10
1.71e+11
t
-3.93
9.17
Number of obs
F( 1,
52)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
0.000
0.000
=
=
=
=
=
=
54
15.44
0.0003
0.2290
0.2141
8.3e+11

-1.35e+11
1.23e+12
-4.37e+10
1.91e+12
Number of obs
F( 2,
49)
Prob > F
R-squared
Adj R-squared
Root MSE
=
52
=
0.79
= 0.4618
= 0.0310
= -0.0085
= 3.2e+11
Predict residuals:
. reg D.e L.e D.L.e
Source
SS
df
MS
Model
Residual
1.5915e+23
4.9669e+24
2
49
7.9574e+22
1.0137e+23
Total
5.1261e+24
51
1.0051e+23
D.e
Coef.
Std. Err.
P>|t|
e
L1.
LD.
-.071485
.063168
.0576305
.1445435
-1.24
0.44
0.221
0.664
-.1872978
-.2273031
.0443278
.353639
_cons
4.82e+10
4.47e+10
1.08
0.286
-4.16e+10
1.38e+11
Conclusion: as L1 s value is not significant thus we accept H0 which

states there is no co integration between GDP and Inflation. The same
result was shown by tsline of both.
2nd Pair GDP and Exports
1.000e+12
2.000e+12
3.000e+12
tsline GDP Exports
1960
1980
2000
2020
Year
GDP (Current US$)
Exports(Goods, Services)
Graph shows both are co integrated, it will be verified by the respective tests.
Run spurious regression

. reg GDP Exports
Source
SS
df
MS
Model
Residual
4.6677e+25
6.2548e+23
1
53
4.6677e+25
1.1801e+22
Total
4.7302e+25
54
8.7597e+23
GDP
Coef.
Exports
_cons
3.527901
7.34e+10
Std. Err.
.0560962
2.13e+10
t
62.89
3.44
Number of obs
F( 1,
53)
Prob > F
R-squared
Adj R-squared
Root MSE
=
55
= 3955.18
= 0.0000
= 0.9868
= 0.9865
= 1.1e+11
P>|t|
0.000
0.001
3.415387
3.06e+10
3.640416
1.16e+11
Predict residuals
Now the next command is
regress D.e3 L.e3 D.L.e3
. regress D.e3 L.e3 D.L.e3
Source
SS
df
MS
Model
Residual
3.7828e+22
2.6731e+23
2
50
1.8914e+22
5.3462e+21
Total
3.0514e+23
52
5.8681e+21
Std. Err.
Number of obs
F( 2,
50)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
53
3.54
0.0366
0.1240
0.0889
7.3e+10
D.e3
Coef.
e3
L1.
LD.
-.2286055
-.0601567
.1017333
.1519005
-2.25
-0.40
0.029
0.694
-.4329428
-.3652578
-.0242683
.2449444
_cons
-1.09e+08
1.01e+10
-0.01
0.991
-2.03e+10
2.01e+10
H0: There is no cointegration

H1: There is cointegration
Here L1s t calculated value is less than supplied table value of 0.029 so H0 is rejected and it is
concluded that GDP and Exports are cointegrated.
Hence all of the three conditions of
cointegration Engle Granger test are fulfilled which are:
Both variables are integrated at the same difference
L1 is significant
Coefficient of L1 is negative
Error Correction Model:

. reg D.GDP D.Exports L.e2
Source
SS
df
MS
Model
Residual
5.7251e+23
2.5454e+23
2
51
2.8625e+23
4.9910e+21
Total
8.2704e+23
53
1.5605e+22
D.GDP
Coef.
Std. Err.
Exports
D1.
3.054832
.285246
e2
L1.
-.2096698
_cons
7.07e+09
Number of obs
F( 2,
51)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
54
57.35
0.0000
0.6922
0.6802
7.1e+10
P>|t|
10.71
0.000
2.482177
3.627487
.0920713
-2.28
0.027
-.3945107
-.0248288
1.05e+10
0.67
0.505
-1.41e+10
2.82e+10
Conclusion: The negative sign of coefficient of error term is negative and significant , its
stationaity is also proved by following dfuller test, hence error correction model is fit.
. dfuller e2
Z(t)
Number of obs
Test
Statistic
1% Critical
Value
-2.674
-3.574
54
5% Critical
10% Critical
Value
Value
-2.927
-2.598
1.000e+12
2.000e+12
3.000e+12
3rd Pair GDP and Imports:
1960
1980
2000
2020
Year
GDP (Current US$)
Imports(Goods, Services)
Graph shows data is cointegrated

. reg GDP Imports
Source
SS
df
MS
Model
Residual
4.6758e+25
5.4435e+23
1
53
4.6758e+25
1.0271e+22
Total
4.7302e+25
54
8.7597e+23
GDP
Coef.
Imports
_cons
3.252524
9.67e+10
Predict residuals
Std. Err.
.0482052
1.96e+10
t
67.47
4.93
Number of obs
F( 1,
53)
Prob > F
R-squared
Adj R-squared
Root MSE
=
55
= 4552.54
= 0.0000
= 0.9885
= 0.9883
= 1.0e+11
P>|t|
0.000
0.000
3.155837
5.73e+10
3.349212
1.36e+11
. reg D.e L.e D.L.e

Source
SS
df
MS
Model
Residual
3.6445e+22
2.1609e+23
2
50
1.8223e+22
4.3219e+21
Total
2.5254e+23
52
4.8565e+21
Std. Err.
Number of obs
F( 2,
50)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
53
4.22
0.0203
0.1443
0.1101
6.6e+10
D.e
Coef.
e
L1.
LD.
-.1950144
-.1766348
.0970647
.1506306
-2.01
-1.17
0.050
0.246
-.3899746
-.4791852
-.0000543
.1259156
_cons
5.10e+08
9.04e+09
0.06
0.955
-1.77e+10
1.87e+10
Here L1s t calculated value is less than supplied table value of -2.01 so H0 is rejected and it is
concluded that GDP and Imports are cointegrated.
Hence all of the three conditions of
cointegration Engle Granger test are fulfilled which are:
L1 is significant

. reg D.GDP D.Imports L.epsilon
Source
SS
df
MS
Model
Residual
6.1744e+23
2.0961e+23
2
51
3.0872e+23
4.1100e+21
Total
8.2704e+23
53
1.5605e+22
Std. Err.
Number of obs
F( 2,
51)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
54
75.11
0.0000
0.7466
0.7366
6.4e+10
D.GDP
Coef.
Imports
D1.
2.84505
.2324736
12.24
0.000
2.37834
3.311761
epsilon
L1.
-.1994135
.0895559
-2.23
0.030
-.3792045
-.0196225
_cons
7.35e+09
9.49e+09
0.77
0.442
-1.17e+10
2.64e+10
Conclusion: as error term s L1 is significant and negative, now stationaity of

error will be checked as:
. dfuller epsilon
Z(t)
Number of obs
Test
Statistic
1% Critical
Value
-2.664
-3.574
54
5% Critical
10% Critical
Value
Value
-2.927
-2.598

.
Conclusion: as error term is also stationary , thus error correction model is fit.
4th pair Exports and Imports
6.000e+11
8.000e+11
2.000e+11
4.000e+11
1.000e+12
Tsline Exports Imports
1960
1980
2000
2020
Year
Exports(Goods, Services)
Imports(Goods, Services)

Reg exports imports
. reg Exports Imports
Source
SS
df
MS
Model
Residual
3.7422e+24
8.0959e+21
1
53
3.7422e+24
1.5275e+20
Total
3.7503e+24
54
6.9451e+22
Exports
Coef.
Imports
_cons
.9201482
7.13e+09
Std. Err.
.0058788
2.39e+09
t
156.52
2.98
Number of obs
F( 1,
53)
Prob > F
R-squared
Adj R-squared
Root MSE
=
55
=24498.63
= 0.0000
= 0.9978
= 0.9978
= 1.2e+10
P>|t|
0.000
0.004
.9083568
2.33e+09
.9319395
1.19e+10
. reg D.e L.e D.L.e
Source
SS
df
MS
Model
Residual
5.0239e+20
3.5537e+21
2
50
2.5119e+20
7.1073e+19
Total
4.0561e+21
52
7.8001e+19
Std. Err.
Number of obs
F( 2,
50)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
53
3.53
0.0367
0.1239
0.0888
8.4e+09
D.e
Coef.
e
L1.
LD.
-.2484818
-.0111272
.1013902
.1419242
-2.45
-0.08
0.018
0.938
-.4521299
-.2961904
-.0448336
.2739359
_cons
2.96e+08
1.16e+09
0.26
0.800
-2.03e+09
2.62e+09
H0: There is no cointegration

H1: There is cointegration
Here L1s t calculate value -2.45 is less than table value so H0 is rejected and it is concluded that
Exports and Imports are cointegrated. Hence all of the three conditions of cointegration Engle
Granger test are fulfilled which are:
L1 is significant

Reg D.exports D.imports L.e
. reg D.Exports D.Imports L.e

Source
SS
df
MS
Model
Residual
6.1213e+22
3.3738e+21
2
51
3.0607e+22
6.6154e+19
Total
6.4587e+22
53
1.2186e+21
Std. Err.
Number of obs
F( 2,
51)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
54
462.66
0.0000
0.9478
0.9457
8.1e+09
D.Exports
Coef.
Imports
D1.
.8725537
.0287025
30.40
0.000
.814931
.9301764
e
L1.
-.2423954
.0911093
-2.66
0.010
-.425305
-.0594857
_cons
1.04e+09
1.20e+09
0.87
0.391
-1.37e+09
3.45e+09
Conclusion: as error term s L1 is significant and negative, now stationaity of

error will be checked as:
. dfuller e
Z(t)
Number of obs
Test
Statistic
1% Critical
Value
-2.705
-3.574
54
5% Critical
10% Critical
Value
Value
-2.927
-2.598

.
Third condition of ECM also satisfied hence error correction model is fit.
5th Pair Inflation and Interest
-10
10
20
30
Tsline inflation interest
1960
1980
2000
2020
Year
Inflation Rate
Real Interest Rate

Reg Inflation Interest
. reg Inflation Interest
Source
SS
df
MS
Model
Residual
525.115503
773.362228
1
46
525.115503
16.8122224
Total
1298.47773
47
27.6271858
Inflation
Coef.
Interest
_cons
-.9330964
7.288771
Std. Err.
.1669597
.6414647
t
-5.59
11.36
Number of obs
F( 1,
46)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
0.000
0.000
=
=
=
=
=
=
48
31.23
0.0000
0.4044
0.3915
4.1003

-1.269169
5.99757
-.597024
8.579973
Predict residuals
Reg D.e L.e D.L.e
. predict e, res
(7 missing values generated)
. reg D.e L.e D.L.e
Source
SS
df
MS
Model
Residual
14.8552694
138.377954
2 7.42763468
43 3.21809196
Total
153.233223
45 3.40518274
Std. Err.
Number of obs
F( 2,
43)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
46
2.31
0.1116
0.0969
0.0549
1.7939
D.e
Coef.
e
L1.
LD.
-.113007
.2765788
.0698214
.1513627
-1.62
1.83
0.113
0.075
-.2538153
-.0286732
.0278014
.5818307
_cons
-.0662731
.2654936
-0.25
0.804
-.6016919
.4691457
Hence all of the three conditions of cointegration Engle Granger test are fulfilled which are:
L1 is significant
Conclusion: as calculated value -1.62 is less than table value so h0 is

rejected and concluded that there is cointegration between inflation rate
and interest rate.
reg D.Inflation D.Interest L.e
. reg D.Inflation D.Interest L.epsilon

Source
SS
df
MS
Model
Residual
329.852801
143.531706
2
164.9264
44 3.26208422
Total
473.384506
46 10.2909675
Std. Err.
Number of obs
F( 2,
44)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
47
50.56
0.0000
0.6968
0.6830
1.8061
D.Inflation
Coef.
Interest
D1.
-1.085917
.1130621
-9.60
0.000
-1.313778
-.8580548
epsilon
L1.
-.0572412
.0685676
-0.83
0.408
-.1954301
.0809476
_cons
-.1031298
.2638602
-0.39
0.698
-.6349051
.4286454
Conclusion: as error term s L1 is not significant, thus error correction model is

not fit.
7. Vector Autoregression (VAR)

1st Pair GDP,Exports, Imports
The first step of VAR model is to determine the stationarity of the data. This
procedure is being performed in 1st topic of this assignment. The data is not
stationary at the level; rather data is stationary at first difference.
I . Determining the appropriate number of Lags:
Varsoc GDP Exports Imports,maxlag(4)
. varsoc GDP Exports Imports, maxlag(4)
Selection-order criteria
Sample: 1964 - 2014
lag
0
1
2
3
4
LL
LR
-4039.78
-3891.46
-3883.29
-3865.61
-3848.93
Endogenous:
Exogenous:
296.64
16.339
35.368
33.363*
Number of obs
df
FPE
AIC
9
9
9
9
0.000
0.060
0.000
0.000
1.4e+65
6.1e+62
6.3e+62
4.5e+62
3.4e+62*
158.54
153.077
153.109
152.769
152.468*
HQIC
158.584
153.251
153.413
153.203
153.032*
51
SBIC
158.654
153.531*
153.905
153.905
153.945
GDP Exports Imports

_cons
Thus the most appropriate number of Lags is 4, as suggested by most of the

selection criteria.
II. Choosing whether it is Unrestricted VAR or Restricted VAR:
Command is:
Vecrank GDP Exports Imports, trend(constant) lag(4)max
. vecrank GDP Exports Imports, trend(constant) lag(4)max

Johansen tests for cointegration
Trend: constant
Sample: 1964 - 2014
maximum
rank
0
1
2
3
maximum
rank
0
1
2
3
parms
30
35
38
39
parms
30
35
38
39
LL
-3865.9695
-3853.6663
-3849.1933
-3848.9254
LL
-3865.9695
-3853.6663
-3849.1933
-3848.9254
Number of obs =
Lags =
eigenvalue
.
0.38275
0.16089
0.01045
eigenvalue
.
0.38275
0.16089
0.01045
51
4
5%
trace
critical
statistic
value
34.0882
29.68
9.4819*
15.41
0.5358
3.76
max
statistic
24.6063
8.9462
0.5358
5%
critical
value
20.97
14.07
3.76
Results:
As calculated value 15.41 is greater than trace statistics 9.4819 so we cant reject
h0.
H0: data is not cointegrated
H1: data is cointegrated
Conclusion: the Data is not cointegrated so unrestricted VAR test will be used.
III. Unrestricted VAR Test:
Command:
Var diffGDP diffExports diffImports, lags(1/4)
*as appropriate number of lags determined in 1st step states it should have 4 lags.
. var D.GDP D.Exports D.Imports, lags(1/4)

Vector autoregression
Sample: 1965 - 2014
FPE
= 4.50e+62
Det(Sigma_ml) = 9.12e+61
No. of obs
AIC
HQIC
SBIC
Equation
Parms
RMSE
R-sq
chi2
P>chi2
D_GDP
D_Exports
D_Imports
13
13
13
1.1e+11
3.0e+10
3.4e+10
0.4576
0.4615
0.4771
42.18965
42.84365
45.61679
0.0000
0.0000
0.0000
Coef.
Std. Err.
P>|z|
=
=
=
=
50
152.7421
153.31
154.2335
D_GDP
GDP
LD.
L2D.
L3D.
L4D.
.380519
-.8739826
.6377902
-.3640291
.2628017
.2634491
.2903967
.3096911
1.45
-3.32
2.20
-1.18
0.148
0.001
0.028
0.240
-.1345628
-1.390333
.0686232
-.9710125
.8956009
-.3576319
1.206957
.2429543
Exports
LD.
L2D.
L3D.
L4D.
3.722847
-2.366835
-1.106319
-4.045534
1.885719
1.881631
1.922412
2.275415
1.97
-1.26
-0.58
-1.78
0.048
0.208
0.565
0.075
.0269059
-6.054764
-4.874178
-8.505266
7.418788
1.321095
2.66154
.4141971
Imports
LD.
L2D.
L3D.
L4D.
-2.496808
2.902288
.7549021
3.413825
2.054648
1.893657
1.971358
2.10747
-1.22
1.53
0.38
1.62
0.224
0.125
0.702
0.105
-6.523844
-.8092123
-3.108889
-.71674
1.530229
6.613789
4.618693
7.544391
_cons
4.79e+10
1.77e+10
2.70
0.007
1.32e+10
8.26e+10
GDP
LD.
L2D.
L3D.
L4D.
.1107332
-.245669
.2401332
.0559665
.0731075
.0732876
.0807841
.0861515
1.51
-3.35
2.97
0.65
0.130
0.001
0.003
0.516
-.032555
-.3893101
.0817993
-.1128873
.2540213
-.1020279
.398467
.2248203
Exports
LD.
L2D.
L3D.
L4D.
.2696115
.0728646
.1250753
-1.465594
.5245791
.523442
.5347867
.6329868
0.51
0.14
0.23
-2.32
0.607
0.889
0.815
0.021
-.7585446
-.9530629
-.9230874
-2.706225
1.297768
1.098792
1.173238
-.2249623
Imports
LD.
L2D.
L3D.
L4D.
-.1699957
.2111111
-.5271659
.9518542
.5715727
.5267875
.5484027
.586267
-0.30
0.40
-0.96
1.62
0.766
0.689
0.336
0.104
-1.290258
-.8213734
-1.602016
-.197208
.9502662
1.243596
.5476836
2.100916
_cons
1.49e+10
4.93e+09
3.02
0.002
5.25e+09
2.46e+10
D_Exports
Interpretation: For Example for every one unit change in Lag 1 of GDP, there
will be .3805 units change in GDP in the same direction. Similarly interpretations
for all variables can be made. If coefficients has positive sign it means change will
be in the same direction.
D_Imports
GDP
LD.
L2D.
L3D.
L4D.
.1546579
-.2962858
.2876106
.0249989
.0804924
.0806907
.0889444
.094854
1.92
-3.67
3.23
0.26
0.055
0.000
0.001
0.792
-.0031043
-.4544366
.1132829
-.1609115
.3124202
-.1381349
.4619384
.2109092
Exports
LD.
L2D.
L3D.
L4D.
.166054
.1686138
.0473798
-1.423096
.5775689
.5763169
.5888075
.6969272
0.29
0.29
0.08
-2.04
0.774
0.770
0.936
0.041
-.9659602
-.9609465
-1.106662
-2.789048
1.298068
1.298174
1.201421
-.0571436
Imports
LD.
L2D.
L3D.
L4D.
-.1459721
.2636059
-.62161
1.016463
.6293094
.5800003
.603799
.645488
-0.23
0.45
-1.03
1.57
0.817
0.649
0.303
0.115
-1.379396
-.8731739
-1.805034
-.2486708
1.087452
1.400386
.5618142
2.281596
_cons
1.54e+10
5.43e+09
2.84
0.004
4.79e+09
2.61e+10
if coefficients has negative sign like in the case of Exports as dependent

variable, lag 2 of Exports states that for every one unit change in L2 of Exports
there will be .768 units change in Exports in the opposite direction.
Opposite direction means:
Increse in lagDecrease in coming period
Decrease in lagIncrease in coming period
IV. Checking the Stability of VAR:

Command immediately after running the regression:
varstable, graph
-1
-.5
Imaginary
.5
Roots of the companion matrix
-1
-.5
0
Real
.5
. varstable, graph
Eigenvalue stability condition
Eigenvalue
.4883815
.4883815
-.2904646
-.2904646
-.6281226
-.6281226
-.8143904
.6841111
.6841111
.1866678
.1866678
.4374025
+
+
+
-
.7509101i
.7509101i
.820659i
.820659i
.5772116i
.5772116i
+
+
-
.4168689i
.4168689i
.5687755i
.5687755i
Modulus
.895758
.895758
.870546
.870546
.85306
.85306
.81439
.801116
.801116
.598624
.598624
.437402
All the eigenvalues lie inside the unit circle.

VAR satisfies stability condition.
.
Conclusion:
This VAR model satisfies the condition of Stability, means this model is reluctant
to change while change in other factors. One might say it is the robustness of the
model.
V. Granger Causality of VAR:
As processes show that data is not cointegrated, so in order to determine the short
run causality the var model will be run on first difference of variables. After
regression the granger causality will be checked. When Granger is applied on first
difference this will predict short run causality.
. var D.GDP D.Exports D.Imports

Vector autoregression
Sample: 1963 - 2014
FPE
= 5.05e+62
Det(Sigma_ml) = 2.24e+62
Equation
Parms
D_GDP
D_Exports
D_Imports
7
7
7
Coef.
No. of obs
AIC
HQIC
SBIC
RMSE
R-sq
chi2
P>chi2
1.2e+11
3.2e+10
3.5e+10
0.2632
0.2848
0.3240
18.57352
20.70917
24.92176
0.0049
0.0021
0.0004
Std. Err.
P>|z|
=
=
=
=
52
152.8886
153.1907
153.6766
D_GDP
GDP
LD.
L2D.
.5204809
-.6347128
.2628698
.2769794
1.98
-2.29
0.048
0.022
.0052655
-1.177583
1.035696
-.0918431
Exports
LD.
L2D.
2.266529
-1.622448
1.863029
1.828841
1.22
-0.89
0.224
0.375
-1.384941
-5.206911
5.917999
1.962016
Imports
LD.
L2D.
-2.25667
2.405585
1.948993
1.872425
-1.16
1.28
0.247
0.199
-6.076627
-1.2643
1.563286
6.075469
_cons
4.80e+10
1.72e+10
2.79
0.005
1.43e+10
8.17e+10
GDP
LD.
L2D.
.161815
-.186485
.0723409
.0762238
2.24
-2.45
0.025
0.014
.0200295
-.3358809
.3036005
-.0370891
Exports
LD.
L2D.
.1463618
.0712939
.5126991
.5032908
0.29
0.14
0.775
0.887
-.8585101
-.9151379
1.151234
1.057726
Imports
LD.
L2D.
-.3037624
.1557817
.5363561
.5152847
-0.57
0.30
0.571
0.762
-1.355001
-.8541578
.7474763
1.165721
_cons
1.59e+10
4.73e+09
3.36
0.001
6.64e+09
2.52e+10
GDP
LD.
L2D.
.215134
-.2436152
.0785389
.0827545
2.74
-2.94
0.006
0.003
.0612007
-.4058109
.3690674
-.0814194
Exports
LD.
L2D.
.213366
-.0023038
.556626
.5464116
0.38
-0.00
0.701
0.997
-.877601
-1.073251
1.304333
1.068643
Imports
LD.
L2D.
-.4856613
.4055034
.5823099
.5594332
-0.83
0.72
0.404
0.469
-1.626968
-.6909654
.6556452
1.501972
_cons
1.61e+10
5.14e+09
3.14
0.002
6.04e+09
2.62e+10
D_Exports
D_Imports
VAR Granger:
. vargranger
Granger causality Wald tests
Equation
Excluded
chi2
df Prob > chi2
D_GDP
D_GDP
D_GDP
D.Exports
D.Imports
ALL
2.5453
3.9025
5.4141
2
2
4
0.280
0.142
0.247
D_Exports
D_Exports
D_Exports
D.GDP
D.Imports
ALL
13.385
.52097
16.108
2
2
4
0.001
0.771
0.003
D_Imports
D_Imports
D_Imports
D.GDP
D.Exports
ALL
19.699
.14925
21.966
2
2
4
0.000
0.928
0.000
H0: GDPs lagged values does not cause change in Exports and Imports
H1: GDPs lagged values cause change in Exports and Imports
Similarly such hypotheses are developed for each variable in the VAR
model.
Conclusion:
For GDP:
GDPs lagged values do not cause change in Exports and Imports in the
short run.
For Exports:
Exports lagged values cause change in GDP in the short run.
For Imports:
Imports lagged values cause change in GDP in the short run.

*Imports and Exports do not cause change in each other in the short
run.
VI . Autocorrelation of Errors:
The varlmar performs a Lagrange multiplier test for the joint null hypothesis
of no auto-correlation of the residuals of the two equations:
. varlmar, mlag(4)
Lagrange-multiplier test
lag
chi2
df
Prob > chi2
1
2
3
4
21.5198
23.2392
24.9213
6.4620
9
9
9
9
0.01053
0.00568
0.00306
0.69294
H0: no autocorrelation at lag order

.
Conclusion:
According to Lagrange multiplier test, there is no autocorrelation of errors in the
proposed VAR Model.
Concluding Remark on the Results:

The Time series results obtained from this real data set indicated that
results are according to theory. For example the economical
relationship between GDP and Exports is proved with the results as
theory suggests.

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Project of Financial Modeling

Time Series Analysis

Hailey College of Commerce

Topics to be covered in this Project:

Applying AIC (Akike Information Criteria) and BIC (Bayes

Data Set Used:

United Kingdoms Real Economic Data

1. Determining whether data is stationary or non

1st Variable GDP:

The correlogram shows GDP is non stationary because 1st PAC is

H0: Data is non stationary

Correlogram of Inflation Rate

MacKinnon approximate p-value for Z(t) = 0.9955

2nd Variable Inflation Rate:

MacKinnon approximate p-value for Z(t) = 0.1985

3rd Variable Interest Rate:

MacKinnon approximate p-value for Z(t) = 0.1649

4th Variable Exports:

MacKinnon approximate p-value for Z(t) = 0.9973

5th Variable Imports:

MacKinnon approximate p-value for Z(t) = 0.9966

1. Making data Stationary by taking differences

. *seems it became stationary, lets confirm by applying the test

MacKinnon approximate p-value for Z(t) = 0.0000

Hence it is concluded that GDP becomes stationary at first difference

2nd Variable Inflation Rate:

Dickey-Fuller test for unit root

MacKinnon approximate p-value for Z(t) = 0.0000

Hence it is proved Inflation Rate is Stationary at first difference

3rd Variable Interest Rate:

MacKinnon approximate p-value for Z(t) = 0.0000

Hence it is proved Interest Rate is stationary at first difference

4th Variable Exports:

MacKinnon approximate p-value for Z(t) = 0.0000

Hence it is proved that Exports are Stationary at first difference

5th Variable Imports:

MacKinnon approximate p-value for Z(t) = 0.0000

Hence it is proved that Imports are Stationary at first difference

. arima GDP, arima(0,1,1)

Log likelihood = -1450.048

[95% Conf. Interval]

ARIMA (2,1,0) Model

. arima GDP, arima(2,1,0)

Log likelihood = -1450.428

[95% Conf. Interval]

Predicting Residuals of Significant ARIMA Models:

Further test applied on error terms of above mentioned significant models is

wntestq e ARIMA (0,1,1)

wntestq e2 AIMA (2,1,0)

Applying AIC (Akike Information Criteria) and BIC (Bayes

N=Obs used in calculating BIC; see [R] BIC note

N=Obs used in calculating BIC; see [R] BIC note

2nd Variable Inflation Rate:

Log likelihood = -132.6454

[95% Conf. Interval]

After predicting the residuals, by applying wntestq test:

Applying AIC and BIC:

N=Obs used in calculating BIC; see [R] BIC note

2nd Model ARIMA (0, 2, 1)

Log likelihood = -133.6337

[95% Conf. Interval]

After predicting the residuals, by applying wntestq test:

Applying AIC and BIC:

N=Obs used in calculating BIC; see [R] BIC note