School of Economics
Economics Department
A Dynamic Approach to Bridging the Link Between Stock Index and GDP
The Case of the Philippines
Submitted To:
Dr. Cesar Rufino
Submitted By:
Pauline Sombillo
11200014
1|Page
Table of Contents
1. Introduction-------------------------------------------------------------------------------------------3
1.1. Background of the Study------------------------------------------------------------------------3
1.2. Statement of the Problem-----------------------------------------------------------------------3
1.3. Significance of the Study------------------------------------------------------------------------3
1.4. Scope and Limitations---------------------------------------------------------------------------3
2. Review of Related Literature-------------------------------------------------------------------------4
3. Theoretical Framework-------------------------------------------------------------------------------5
3.1. Harrod- Domar Model---------------------------------------------------------------------------5
3.2. Efficient Capital Market Hypothesis ------------------------------------------------------------5
4. Methodology------------------------------------------------------------------------------------------5
4.1. Data-----------------------------------------------------------------------------------------------5
4.2. Description of the Variables and A Priori Expectations---------------------------------------6
4.3. Initial Tests----------------------------------------------------------------------------------------6
4.3.1.Test for Stationarity--------------------------------------------------------------------------6
4.3.2.Test for Optimal Lag Structure------------------------------------------------------------12
4.3.3.Test for Cointegration---------------------------------------------------------------------13
4.3.4.Test for Causality--------------------------------------------------------------------------14
4.4. Static Model-------------------------------------------------------------------------------------16
4.5. Dynamic Model--------------------------------------------------------------------------------18
4.5.1.General Distributed Lag Model-----------------------------------------------------------18
4.5.2.Koyck Distributed Lag Model using OLS Estimation-------------------------------------19
4.5.3.Koyck Distributed Lag Model using 2SLS Estimation------------------------------------21
4.5.4.Almon Polynomial Distributed Lag Model-----------------------------------------------23
4.5.5.Autoregressive Distributed Lag Model---------------------------------------------------24
4.6. Results, Conclusion and Recommendations-------------------------------------------------26
4.6.1.Unit Roots Test Results---------------------------------------------------------------------26
4.6.2.Optimal Lag Structure Test Results--------------------------------------------------------26
4.6.3.Cointegration Test Results-----------------------------------------------------------------26
4.6.4.Causality Test Results----------------------------------------------------------------------26
4.6.5.Static Model Results-----------------------------------------------------------------------26
4.6.6.Dynamic Model Results-------------------------------------------------------------------26
4.6.7.Summary of Statistics----------------------------------------------------------------------28
4.7. References--------------------------------------------------------------------------------------29
4.8. Appendix----------------------------------------------------------------------------------------30
4.8.1.Data----------------------------------------------------------------------------------------30
2|Page
I.
Introduction
I.1. Background of the Study
Since the Global Financial Crisis of 2008, the Philippines stock index (PSEi) has been on the bull
for several consecutive years now. It was reported that the PSEi is one of the best performing
stock market index in the world, gaining more than 350%. In terms of GDP, although the growth
is slow and uneven, IMF predicted that the Philippines GDP will continue to grow due to low
oil prices and higher public spending due to inflation drops and rising spending power. In terms
of monetary controls, the Bangko Sentral ng Pilipinas has been the strongest among the
central banks in the world. They were able to keep benchmark Philippine rates stable, and
policy rates steady. Specifically, the Philippine Peso is going stronger against the US Dollars
because some of the major currencies suffered their sharpest monthly decline. Aside from the
improved and stronger monetary, the fiscal policies of the Philippines has improved in terms of
tax collection and reduced corruption. Also, aside from the ones mentioned above, the
Philippines has been a major beneficiary of foreign funds, therefore, generating further boom
in the economy. Lastly, Initial Public Offerings (IPOs) of various companies are on the rise.
According to PSE President, Hans B. Sicat, at least 10 IPOs will take place in 2015, following the
successful 2014 debut of five companies like the Double Dragon Properties, Xurpas, among
others.
I.2. Statement of the Problem
The problem of conducting a study like this usually lies on statistical problems of econometrics
itself. There are several caveats or challenges in conducting time series econometric analysis.
First and foremost is that empirical research needs data to be stationary, which is contrary to
what is available to us, in order to be deemed significant. Also, because of the use of time
series data, the regression is almost always subjected to autocorrelation. Because of these
shortcomings, the results of this study may be non- spurious. However, there are plenty of
statistical estimation method and tests available and it is up to the researcher to fix these
problems to be able to generate good results. (Rufino, 2015)
I.3. Significance of the Study
Over the past years, our GDP showed high positive growth rate while at the same time, the
stock market has maintained a growth streak for almost 6 years now. In line with this, PhilEquity
Management Inc, predicted that the Philippines stock Index (PSEi) will continue to outperform
and has the potential to reach the level of 8000. Moreover, the International Monetory Fund
(IMF) expects the Philippines to grow by 6.6% in 2015 and 6.4% in 2016. These predictions show
high potential in the growth of the Philippine Economy. If this continues, the Stock market can
be considered as an indicator of the booming economy. This paper seeks to give insights on
the short run and long run relationship of Stock Index and GDP. The results aim to provide
possible action or recourse as to how investors should go about in the world of stocks.
I.4. Scope and Limitations
The paper is primarily focused on checking whether there is a relationship, either positive or
negative, between stock index and GDP. The researcher want to know if there is a link
between them and if the independent variable stock index affect the dependent variable
GDP or vice versa. All of these will be done through the use of the various state of the art
regression models and/or tests available. With the aid of economic theories and related
literature available, the researcher would be able to back up the regression results on the
relationship of the variables. However, performing dynamic econometric models requires the
number of observation to be at least 50 years. Stock investment in the Philippines only started
during the year 1987, thus, the regression will only generate a total of 28 observations, which is
3|Page
basically not good enough for dynamic regression to produce spurious results. Because of
these limitations, the researcher opted to use quarterly data of Stock Index and GDP,
increasing the number of observations from 28 to 112.
II.
4|Page
impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.
Because of this, it is almost always no possible to outperform the market with just expert
knowledge of stock selection and proper market timing and that the only way an investor can
possibly obtain higher returns is by purchasing riskier investments. (Investopedia, 2015)
IV. Methodology
IV.1. Data
The researcher have gathered all the necessary data needed for this study in National
Statistics Coordination Board (NSCB) and Yahoo! Finance. The researcher was able to gather
112 observations, which consist of quarterly data from January 1987- December 2014.
. set obs 112
obs was 112, now 112
. generate date =tq(1987q1) + _n-1
. format %tq date
. tsset date
time variable:
delta:
. summarize
Variable
Obs
Mean
year
gdp
sp
date
0
112
112
112
1187818
2476.161
163.5
Std. Dev.
875780.4
1619.189
32.47563
Min
Max
170595
511.22
108
3584882
7283.07
219
. describe
Contains data
obs:
vars:
size:
variable name
112
5
2,912 (99.9% of memory free)
storage
type
year
sp
gdp
date
ehat
Sorted by:
Note:
str6
float
float
float
float
display
format
value
label
%9s
%8.0g
%8.0g
%tq
%9.0g
YEAR
SP
GDP
Residuals
date
dataset has changed since last saved
. corr sp gdp
(obs=112)
sp
gdp
5|Page
variable label
sp
gdp
1.0000
0.8324
1.0000
1.00
0.50
-1.00
-0.50
0.00
0.50
0.00
-0.50
-1.00
1.00
Cross-correlogram
-10
-5
0
Lag
10
Independent
Variable
GDP
Stock Index
Statistical indicator used in measurement and reporting of
changes in the market value of a group of stocks/shares. || Data
are in PHP currency. || (Source: Yahoo! Finance)
A Priori Expectations
Definition/ Specification/ Source/ Intuition
6|Page
8000
6000
4000
SP
0
2000
1985q1
1995q1
2000q1
date
2005q1
2010q1
2015q1
2000q1
date
2005q1
2010q1
2015q1
GDP
1.0e+06
2.0e+06
GDP
3.0e+06
4.0e+06
IV.3.1.1.2.
1990q1
1985q1
1990q1
1995q1
IV.3.1.2.
Via Correlogram (At Level)
IV.3.1.2.1.
Stock Index
IV.3.1.2.2.
7|Page
GDP
By looking at the graph and the correlogram at level, we have proven the nonstationarity of the variables Stock Index and GDP because there exist an upward
trend. Stock index as well as GDP are said to be a Random Walk Model. Random
Walk Model is said to have its mean Y (Stock Index) equal to its initial constant value,
but as t increases, its variance increases indefinitely, therefore, resulting to
stationarity of variables. In general, Random Walk Model is a nonstationary
stochastic process.
IV.3.1.3.
Unit root test is one formal test of stationarity. As mentioned above, the available data
are almost always non- stationary, that is why, we need to transform them into
stationary variables.
. dfuller SP
Dickey-Fuller test for unit root
Z(t)
Number of obs
Test
Statistic
1% Critical
Value
0.633
-3.506
111
Interpolated Dickey-Fuller
5% Critical
10% Critical
Value
Value
-2.889
-2.579
Z(t)
Number of obs
Test
Statistic
1% Critical
Value
-9.621
-3.507
110
Interpolated Dickey-Fuller
5% Critical
10% Critical
Value
Value
8|Page
-2.889
-2.579
. dfuller GDP
Dickey-Fuller test for unit root
Number of obs
Test
Statistic
1% Critical
Value
0.743
-3.506
Z(t)
111
Interpolated Dickey-Fuller
5% Critical
10% Critical
Value
Value
-2.889
-2.579
Z(t)
Number of obs
Test
Statistic
1% Critical
Value
-25.805
-3.507
110
Interpolated Dickey-Fuller
5% Critical
10% Critical
Value
Value
-2.889
-2.579
Developed by David Dickey and Wayne Fuller, the Augmented Dickey Fuller is
developed version of Dickey- Fuller Test or the tau Statistic, which suffers from
autocorrelation of the auxiliary regression, hence not a white noise. In order to
determine the number of unit root or the number of times a given time series is to be
differentiated to make it stationary, the MacKinnon approximate p- value for Z(t) must
be significant at 95% confidence interval.
IV.3.1.4.
. dfgls sp
DF-GLS for sp
Maxlag = 12 chosen by Schwert criterion
[lags]
DF-GLS tau
Test Statistic
12
11
10
9
8
7
6
5
4
3
2
1
-1.689
-1.839
-1.347
-0.956
-0.855
-0.774
-0.992
-0.976
-1.162
-1.121
-1.009
-1.101
1% Critical
Value
5% Critical
Value
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
9|Page
Number of obs =
-2.766
-2.794
-2.821
-2.847
-2.872
-2.897
-2.921
-2.943
-2.964
-2.983
-3.001
-3.017
314.6483
341.7927
341.7927
99
10% Critical
Value
-2.493
-2.519
-2.544
-2.569
-2.593
-2.616
-2.638
-2.658
-2.677
-2.695
-2.711
-2.725
. dfgls
gdp
DF-GLS tau
Test Statistic
12
11
10
9
8
7
6
5
4
3
2
1
-1.888
-1.241
-1.163
-0.988
-0.792
-0.452
-0.135
0.034
-0.301
1.870
0.135
0.173
1% Critical
Value
5% Critical
Value
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
-3.566
IV.3.1.5.
Number of obs =
99
10% Critical
Value
-2.766
-2.794
-2.821
-2.847
-2.872
-2.897
-2.921
-2.943
-2.964
-2.983
-3.001
-3.017
-2.493
-2.519
-2.544
-2.569
-2.593
-2.616
-2.638
-2.658
-2.677
-2.695
-2.711
-2.725
21093.07
21093.07
21093.07
. pperron sp
Phillips-Perron test for unit root
Z(rho)
Z(t)
Number of obs
=
Newey-West lags =
Test
Statistic
1% Critical
Value
1.285
0.556
-19.837
-3.506
111
4
Interpolated Dickey-Fuller
5% Critical
10% Critical
Value
Value
-13.722
-2.889
-11.015
-2.579
Z(rho)
Z(t)
Number of obs
=
Newey-West lags =
Test
Statistic
1% Critical
Value
-100.981
-9.621
-19.833
-3.507
Interpolated Dickey-Fuller
5% Critical
10% Critical
Value
Value
10 | P a g e
110
4
-13.720
-2.889
-11.013
-2.579
. pperron
gdp
Number of obs
=
Newey-West lags =
Test
Statistic
1% Critical
Value
2.852
2.947
-19.837
-3.506
Z(rho)
Z(t)
111
4
Interpolated Dickey-Fuller
5% Critical
10% Critical
Value
Value
-13.722
-2.889
-11.015
-2.579
Z(rho)
Z(t)
Number of obs
=
Newey-West lags =
Test
Statistic
1% Critical
Value
-186.534
-29.532
-19.833
-3.507
110
4
Interpolated Dickey-Fuller
5% Critical
10% Critical
Value
Value
-13.720
-2.889
-11.013
-2.579
The Philips Perron Test is a non- parametric alternative to the Augmented Dickey Fuller
Test. Both of them have the same null hypothesis (H1) which is the non- stationarity
property or the unit root and alternative hypothesis (H 1) of stationarity property. The
difference between the two lies on the PPERRONs employment of correction to the
statistic of the coefficient which is robust or consistent whether tested for
heteroscedasticity or autocorrelation.
IV.3.1.6.
Correlogram at Stationary Level
IV.3.1.6.1.
Stock Index
IV.3.1.6.2.
11 | P a g e
GDP
. varsoc sp gdp
Selection-order criteria
Sample: 1988q1 - 2014q4
lag
0
1
2
3
4
LL
-2518.72
-2220.4
-2173.76
-2173.4
-2038.28
Endogenous:
Exogenous:
IV.3.2.2.
12 | P a g e
LR
596.64
93.281
.71215
270.24*
Number of obs
df
4
4
4
4
p
0.000
0.000
0.950
0.000
sp gdp
_cons
FPE
6.4e+17
2.8e+15
1.3e+15
1.3e+15
1.2e+14*
AIC
46.68
41.2296
40.4399
40.5074
38.0793*
HQIC
46.7001
41.29
40.5406
40.6484
38.2605*
108
SBIC
46.7296
41.3786
40.6883
40.8551
38.5263*
. reg sp gdp
Source
SS
df
MS
Model
Residual
201621048
89395936.7
1
110
201621048
812690.334
Total
291016985
111
2621774.64
sp
Coef.
gdp
_cons
.0015389
648.2252
Std. Err.
.0000977
143.9598
t
15.75
4.50
Number of obs
F( 1,
110)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
112
248.09
0.0000
0.6928
0.6900
901.49
P>|t|
0.000
0.000
.0013453
362.9308
.0017325
933.5197
SS
df
MS
Model
Residual
199065386
88055821.3
2
108
99532692.9
815331.679
Total
287121207
110
2610192.79
Std. Err.
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
111
122.08
0.0000
0.6933
0.6876
902.96
sp
Coef.
gdp
--.
L1.
.0008807
.0006836
.0005526
.0005689
1.59
1.20
0.114
0.232
-.0002147
-.0004441
.0019761
.0018113
_cons
642.5066
146.2741
4.39
0.000
352.566
932.4472
13 | P a g e
. reg sp gdp
Source
SS
df
MS
Model
Residual
201621048
89395936.7
1
110
201621048
812690.334
Total
291016985
111
2621774.64
sp
Coef.
gdp
_cons
.0015389
648.2252
Std. Err.
.0000977
143.9598
t
15.75
4.50
Number of obs
F( 1,
110)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
112
248.09
0.0000
0.6928
0.6900
901.49
P>|t|
0.000
0.000
.0013453
362.9308
.0017325
933.5197
SS
df
MS
Model
Residual
1661350.81
17760174.6
2
107
830675.405
165982.94
Total
19421525.4
109
178179.132
Std. Err.
Number of obs
F( 2,
107)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
110
5.00
0.0084
0.0855
0.0684
407.41
D.ehat
Coef.
ehat
L1.
LD.
-.0779225
-.202828
.0451633
.0978853
-1.73
-2.07
0.087
0.041
-.1674535
-.3968741
.0116085
-.0087819
_cons
13.70796
38.90601
0.35
0.725
-63.41868
90.83459
IV.3.3.2.
Johansen Test for Cointegration
IV.3.3.2.1.
With 1 Lag (Using Alt- Tinbergen Approach)
. vecrank sp gdp, lag(1)
Johansen tests for cointegration
Trend: constant
Number of obs =
Sample: 1987q2 - 2014q4
Lags =
maximum
rank
0
1
2
parms
2
5
6
IV.3.3.2.2.
LL
-2285.1287
-2281.7459
-2279.975
eigenvalue
.
0.05913
0.03140
111
1
5%
trace
critical
statistic
value
10.3073*
15.41
3.5416
3.76
parms
14
17
18
LL
-2126.74
-2039.6806
-2038.2814
eigenvalue
.
0.80055
0.02558
108
4
5%
trace
critical
statistic
value
176.9172
15.41
2.7983*
3.76
14 | P a g e
3. Feedback or Bilateral Causality. i.e. both GDP and Stock Index influences each other
and vice versa.
4. Independence. There are no causality between the two variables.
However, it is important to note that even if a variable granger causes another variable, it
doesnt necessarily mean that that variable is exogenous. We should be able to point out
the distinction between the types of exogeneity, that is, weak, strong and super. (Gujarati,
2009)
IV.3.4.1.
Via Stata
IV.3.4.1.1.
With 1 Lag (Using Alt- Tinbergen Approach)
. var sp gdp, lag (1)
Vector autoregression
Sample: 1987q2 - 2014q4
Log likelihood = -2279.975
FPE
= 2.65e+15
Det(Sigma_ml) = 2.38e+15
Equation
Parms
sp
gdp
3
3
Coef.
No. of obs
AIC
HQIC
SBIC
RMSE
R-sq
chi2
P>chi2
324.69
154581
0.9603
0.9693
2688.147
3505.921
0.0000
0.0000
Std. Err.
=
=
=
=
111
41.18874
41.24815
41.3352
P>|z|
.8781823
sp
sp
L1.
.9450345
.0341089
27.71
0.000
gdp
L1.
.0001521
.0000627
2.43
0.015
.0000292
.000275
_cons
16.87068
56.70058
0.30
0.766
-94.26041
128.0018
sp
L1.
-.0349259
63.62027
1.011887
gdp
31.79267
16.23887
1.96
0.050
gdp
L1.
.9651541
.0298573
32.33
0.000
.9066349
1.023673
_cons
-5964.657
26994.51
-0.22
0.825
-58872.93
46943.61
. vargranger
Granger causality Wald tests
Equation
Excluded
sp
sp
gdp
ALL
5.8841
5.8841
1
1
0.015
0.015
gdp
gdp
sp
ALL
3.833
3.833
1
1
0.050
0.050
IV.3.4.1.2.
15 | P a g e
chi2
Parms
sp
gdp
3
3
Coef.
No. of obs
AIC
HQIC
SBIC
RMSE
638.489
31705.1
R-sq
chi2
P>chi2
0.8463
0.9987
594.8317
82771.71
0.0000
0.0000
Std. Err.
=
=
=
=
108
39.36678
39.42719
39.51578
P>|z|
.6391952
.917781
sp
sp
L4.
.7784881
.0710691
10.95
0.000
gdp
L4.
.0005875
.0001235
4.76
0.000
.0003454
.0008295
_cons
86.42475
118.0143
0.73
0.464
-144.8791
317.7286
sp
L4.
gdp
4.210319
3.529041
1.19
0.233
-2.706474
11.12711
gdp
L4.
1.07895
.0061331
175.92
0.000
1.066929
1.090971
_cons
12233.41
5860.175
2.09
0.037
747.6732
23719.14
. vargranger
Granger causality Wald tests
Equation
Excluded
sp
sp
gdp
ALL
22.622
22.622
chi2
0.000
0.000
gdp
gdp
sp
ALL
1.4234
1.4234
1
1
0.233
0.233
IV.3.4.2.
Via Eviews
IV.3.4.2.1.
Using 1 Lag (Using Alt- Tinbergen Approach)
Pairwise Granger Causality Tests
Date: 04/16/15 Time: 22:11
Sample: 1987:1 2014:4
Lags: 1
Null Hypothesis:
Obs
F-Statistic
Probability
111
3.72944
5.72511
0.05608
0.01845
Obs
F-Statistic
Probability
108
2.84024
1.53675
0.02816
0.19741
16 | P a g e
. reg sp gdp
Source
SS
df
MS
Model
Residual
201621048
89395936.7
1
110
201621048
812690.334
Total
291016985
111
2621774.64
sp
Coef.
gdp
_cons
.0015389
648.2252
Std. Err.
.0000977
143.9598
t
15.75
4.50
Number of obs
F( 1,
110)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
112
248.09
0.0000
0.6928
0.6900
901.49
P>|t|
0.000
0.000
.0013453
362.9308
.0017325
933.5197
VIF
1/VIF
gdp
1.00
1.000000
Mean VIF
1.00
=
=
4.44
0.0350
2,
112) =
.2189947
. bgodfrey
Breusch-Godfrey LM test for autocorrelation
lags(p)
chi2
88.511
df
1
17 | P a g e
0:
1:
2:
3:
4:
5:
6:
7:
8:
9:
10:
11:
12:
13:
14:
rho = 0.0000
rho = 0.8946
rho = 0.9801
rho = 0.9953
rho = 0.9903
rho = 0.9923
rho = 0.9915
rho = 0.9919
rho = 0.9917
rho = 0.9918
rho = 0.9918
rho = 0.9918
rho = 0.9918
rho = 0.9918
rho = 0.9918
Number of obs
F( 1,
110)
Prob > F
R-squared
Root MSE
sp
Coef.
gdp
_cons
-.0000229
3466.521
rho
.991775
Semirobust
Std. Err.
.0002366
2455.832
P>|t|
-0.10
1.41
0.923
0.161
=
=
=
=
=
112
0.01
0.9231
.
337.78
.0004459
8333.403
SS
df
MS
Model
Residual
199065386
88055821.3
2
108
99532692.9
815331.679
Total
287121207
110
2610192.79
Std. Err.
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
111
122.08
0.0000
0.6933
0.6876
902.96
sp
Coef.
gdp
--.
L1.
.0008807
.0006836
.0005526
.0005689
1.59
1.20
0.114
0.232
-.0002147
-.0004441
.0019761
.0018113
_cons
642.5066
146.2741
4.39
0.000
352.566
932.4472
18 | P a g e
Variable
VIF
1/VIF
gdp
L1.
--.
31.50
31.50
0.031749
0.031749
Mean VIF
31.50
. hettest
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: fitted values of sp
chi2(1)
Prob > chi2
=
=
3.72
0.0538
. dwstat
Durbin-Watson d-statistic(
3,
111) =
.1452188
. bgodfrey
Breusch-Godfrey LM test for autocorrelation
lags(p)
chi2
96.431
df
0.0000
0:
1:
2:
3:
4:
5:
6:
7:
8:
9:
10:
11:
12:
13:
14:
rho = 0.0000
rho = 0.9364
rho = 0.9474
rho = 0.9511
rho = 0.9527
rho = 0.9534
rho = 0.9537
rho = 0.9538
rho = 0.9539
rho = 0.9539
rho = 0.9540
rho = 0.9540
rho = 0.9540
rho = 0.9540
rho = 0.9540
SS
df
MS
Model
Residual
895369.257
11966590.6
2
108
447684.628
110801.764
Total
12861959.8
110
116926.907
sp
Coef.
gdp
--.
L1.
Std. Err.
.0005189
.0007536
.0002102
.0002241
_cons
1235.557
764.9823
rho
.953973
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
111
4.04
0.0203
0.0696
0.0524
332.87
P>|t|
2.47
3.36
0.015
0.001
.0001023
.0003095
.0009355
.0011977
1.62
0.109
-280.7703
2751.885
19 | P a g e
SS
df
MS
Model
Residual
275595927
11525280.1
2
108
137797964
106715.556
Total
287121207
110
2610192.79
sp
Coef.
Std. Err.
gdp
.0001314
.000063
sp
L1.
.9521312
_cons
19.72673
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
=
111
= 1291.26
= 0.0000
= 0.9599
= 0.9591
= 326.67
P>|t|
2.09
0.039
6.50e-06
.0352841
26.98
0.000
.882192
1.02207
57.77982
0.34
0.733
-94.80289
134.2564
.0002563
VIF
1/VIF
sp
L1.
gdp
3.13
3.13
0.319593
0.319593
Mean VIF
3.13
. hettest
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: fitted values of sp
chi2(1)
Prob > chi2
=
=
7.20
0.0073
. dwstat
Durbin-Watson d-statistic(
3,
111) =
1.835301
. bgodfrey
Breusch-Godfrey LM test for autocorrelation
lags(p)
chi2
df
0.705
0.4010
Number of obs
F( 2,
108)
Prob > F
R-squared
Root MSE
Robust
Std. Err.
sp
Coef.
P>|t|
gdp
.0001314
.000064
2.05
0.042
4.58e-06
.0002582
sp
L1.
.9521312
.0365531
26.05
0.000
.8796765
1.024586
_cons
19.72673
53.64224
0.37
0.714
-86.60149
126.055
20 | P a g e
=
111
= 1034.54
= 0.0000
= 0.9599
= 326.67
= 412.0999482
I.3.2.1.3.2. Long Run Multiplier
0
=
1
0.0001314
=
= 0.002745003008
1 0.9521312
I.3.2.1.3.3. Mean Lag (average length of lag)
0.9521312
=
= 19.89043385
1
1 0.9521312
I.3.2.1.3.4. Median Lag (length of time that 50% of the total long run effect will
be felt)
2
2
=
= 14.13073847
0.9521312
, which takes the values of 0< <1 is the rate of decline or decay of the distributed lag
and (1 ) is the speed of adjustment. The effect of to 0 (lag coefficient) is that the
closer it is to 1, the slower the rate of decline in the lag coefficient, consequently, the
closer it is to zero (0), the faster the rate of decline in the lag coefficient. In this case,
since the is closer to 1, distant past values of X variable (GDP) will exert sizable impact
on Y (Stock Index). (Gujarati, 2009)
The mean lag is the lag- weighted average of time. The results showed a mean lag of
19.89043385 Quarters, meaning, it takes quite some time, on the average for the
effects of changes in the GDP to be felt on Stock Index.
The median lag is the time required for the first half of the total change in Y (Stock Index)
following a unit sustained change in X (GDP). The calculation resulted to a median lag
of 14.12073847 Quarters, which means the speed of adjustment is low.
I.3.2.2. Initial Koyck Distributed Lag Model using 2SLS Estimation
. ivreg sp gdp (l1.sp= gdp l1.gdp)
Instrumental variables (2SLS) regression
Source
df
MS
Model
Residual
245597687
41523520.6
2
108
122798843
384477.043
Total
287121207
110
2610192.79
t
P>|t|
=
=
=
=
=
=
111
258.88
0.0000
0.8554
0.8527
620.06
Coef.
sp
L1.
1.54371
.8822743
1.75
0.083
-.2051102
3.292531
gdp
_cons
-.0007401
-376.6358
.0013015
599.5412
-0.57
-0.63
0.571
0.531
-.0033198
-1565.03
.0018397
811.7588
L.sp
gdp L.gdp
Std. Err.
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
sp
Instrumented:
Instruments:
21 | P a g e
SS
SS
df
MS
Model
Residual
182985295
85223644.4
2
108
91492647.6
789107.819
Total
268208940
110
2438263.09
Std. Err.
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
111
115.94
0.0000
0.6822
0.6764
888.32
L.sp
Coef.
gdp
--.
L1.
.0010499
.0004428
.0005437
.0005597
1.93
0.79
0.056
0.431
-.0000277
-.0006666
.0021275
.0015523
_cons
660.1901
143.9025
4.59
0.000
374.9504
945.4299
SS
df
MS
Model
Residual
245597687
41523520.6
2
108
122798843
384477.043
Total
287121207
110
2610192.79
t
P>|t|
=
=
=
=
=
=
111
258.88
0.0000
0.8554
0.8527
620.06
sp
Coef.
sp
L1.
1.54371
.8822743
1.75
0.083
-.2051102
3.292531
gdp
_cons
-.0007401
-376.6358
.0013015
599.5412
-0.57
-0.63
0.571
0.531
-.0033198
-1565.03
.0018397
811.7588
Instrumented:
Instruments:
Std. Err.
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
L.sp
gdp L.gdp
3,
111) =
.9134841
sp
Coef.
Robust
Std. Err.
Number of obs
F( 2,
108)
Prob > F
R-squared
Root MSE
P>|t|
111
228.10
0.0000
0.8554
620.06
sp
L1.
1.54371
.8677846
1.78
0.078
-.1763891
3.26381
gdp
_cons
-.0007401
-376.6358
.0012938
576.9533
-0.57
-0.65
0.569
0.515
-.0033047
-1520.257
.0018245
766.9858
Instrumented:
Instruments:
L.sp
gdp L.gdp
22 | P a g e
=
=
=
=
=
0.0007401
= 0.001361203583
1 1.54371
I.3.2.2.3.3. Mean Lag (average length of lag)
1.54371
=
= 2.839215758
1
1 1.54371
I.3.2.2.3.4. Median Lag (length of time that 50% of the total long run effect will
be felt)
=
2
2
=
= 1.596419538
1.54371
, which takes the values of 0< <1 is the rate of decline or decay of the distributed lag
and (1 ) is the speed of adjustment. The effect of to 0 (lag coefficient) is that the
closer it is to 1, the slower the rate of decline in the lag coefficient, consequently, the
closer it is to zero (0), the faster the rate of decline in the lag coefficient. In this case,
since the is closer to 1, distant past values of X variable (GDP) will exert sizable impact
on Y (Stock Index). (Gujarati, 2009)
The mean lag is the lag- weighted average of time. The results showed a mean lag of
-2.839215758 Quarters, meaning, it doesnt take quite some time (as seen in the
negative value), on the average for the effects of changes in the GDP to be felt on
Stock Index.
The median lag is the time required for the first half of the total change in Y (Stock Index)
following a unit sustained change in X (GDP). The calculation resulted to a median lag
of -1.596419538 Quarters, which means the speed of adjustment is high.
I.3.3. Almon Polynomial Distributed Lag Model
I.3.3.1. Initial Almon Polynomial Distributed Lag Model using OLS Estimation
. reg sp gdp l1.gdp
Source
SS
df
MS
Model
Residual
199065386
88055821.3
2
108
99532692.9
815331.679
Total
287121207
110
2610192.79
Std. Err.
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
111
122.08
0.0000
0.6933
0.6876
902.96
sp
Coef.
gdp
--.
L1.
.0008807
.0006836
.0005526
.0005689
1.59
1.20
0.114
0.232
-.0002147
-.0004441
.0019761
.0018113
_cons
642.5066
146.2741
4.39
0.000
352.566
932.4472
23 | P a g e
Variable
VIF
1/VIF
gdp
L1.
--.
31.50
31.50
0.031749
0.031749
Mean VIF
31.50
. hettest
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: fitted values of sp
chi2(1)
Prob > chi2
=
=
3.72
0.0538
. dwstat
Durbin-Watson d-statistic(
3,
111) =
.1452188
. bgodfrey
Breusch-Godfrey LM test for autocorrelation
lags(p)
chi2
96.431
df
0.0000
0:
1:
2:
3:
4:
5:
6:
7:
8:
9:
10:
11:
12:
13:
14:
rho = 0.0000
rho = 0.9364
rho = 0.9474
rho = 0.9511
rho = 0.9527
rho = 0.9534
rho = 0.9537
rho = 0.9538
rho = 0.9539
rho = 0.9539
rho = 0.9540
rho = 0.9540
rho = 0.9540
rho = 0.9540
rho = 0.9540
SS
df
MS
Model
Residual
895369.257
11966590.6
2
108
447684.628
110801.764
Total
12861959.8
110
116926.907
sp
Coef.
Std. Err.
gdp
--.
L1.
.0005189
.0007536
.0002102
.0002241
_cons
1235.557
764.9823
rho
.953973
Number of obs
F( 2,
108)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
111
4.04
0.0203
0.0696
0.0524
332.87
P>|t|
2.47
3.36
0.015
0.001
.0001023
.0003095
.0009355
.0011977
1.62
0.109
-280.7703
2751.885
24 | P a g e
SS
df
MS
Model
Residual
275769787
11351420.4
3
107
91923262.2
106088.041
Total
287121207
110
2610192.79
Std. Err.
Number of obs
F( 3,
107)
Prob > F
R-squared
Adj R-squared
Root MSE
P>|t|
=
=
=
=
=
=
111
866.48
0.0000
0.9605
0.9594
325.71
sp
Coef.
gdp
--.
L1.
-.0001154
.0002635
.0002028
.0002058
-0.57
1.28
0.571
0.203
-.0005173
-.0001445
.0002866
.0006715
sp
L1.
.9487026
.035282
26.89
0.000
.8787602
1.018645
_cons
16.18251
57.67617
0.28
0.780
-98.15377
130.5188
VIF
1/VIF
32.58
31.68
0.030689
0.031566
3.15
0.317751
22.47
=
=
82.82
0.0000
4,
111) =
. dwstat
Durbin-Watson d-statistic(
1.814792
. bgodfrey
Breusch-Godfrey LM test for autocorrelation
lags(p)
chi2
df
0.945
0.3309
25 | P a g e
Number of obs
F( 3,
107)
Prob > F
R-squared
Root MSE
Robust
Std. Err.
sp
Coef.
P>|t|
gdp
--.
L1.
-.0001154
.0002635
.0002436
.0002473
-0.47
1.07
0.637
0.289
sp
L1.
.9487026
.0349297
27.16
_cons
16.18251
53.19034
0.30
=
=
=
=
=
111
937.36
0.0000
0.9605
325.71
.0003676
.0007537
0.000
.8794585
1.017947
0.762
-89.26113
121.6262
II.
26 | P a g e
27 | P a g e
0.035
0.2189947
gdp
0.9231
0.6928
1.777744
31.5
0.1452188
0.0203
0.0696
1.771909
0.0073
0.9599
1.835301
L1.gdp; sp
0.8923
0.913484
31.5
0.1452188
0.0203
0.0696
1.771909
22.47
gdp; L1.gdp
0.9605
1.814792
We have reiterated above the tendency of our regression results to be spurious or nonsense, even
if our sample is large. (Yule, n.d.) According to Granger and Newbold, we can consider our
regression to be non- spurious if we have proven that 2 < . Therefore,
based from the table above, the results of our regression is said to be non- spurious.
The objective of this study was to determine whether GDP have a positive or negative effect on
Stock Index. Even though there were some insignificant values present in the model, and some of
our models did not support our a priori expectations, we have proven the relationship between
the two. As seen in the regression generated, the correlation between stock index and GDP varies
per model. For the most part of the paper, and given that we have proven the bilateral causality
of Stock Index and GDP through the Granger Causality Test, we can conclude that there is a
positive relationship between the two variables. Stock market boom is a result of progressing
economy and the progressing economy causes the stock market to boom.
28 | P a g e
It is also important to note that stock markets are the way they are now because of expectations.
Expectations play a crucial role in determining whether stock market will rise or fall. Anticipating
the future is rather very difficult, and investors are continuously guessing, anticipating and
changing their decisions but then never getting the exact forecast or prediction. More often than
not, investors tend to anticipate future changes in GDP growth, but usually, inexactly. But again,
the main point is that investment is a forward-looking process. If you reverse the order and look at
how much GDP growth in the past anticipates risk premiums in the future, you find that they do
not.
In the future, researchers can make use of various state of the art econometric models to predict
or forecast the future values of stock. Even though the results may not be as accurate as they are,
because of the crucial role expectations play in the rise and fall of the market, it can be a good
start if you are into stock markets. It will, at the very least help you determine the course of your
investment, hence, avoiding possible loss in profit in case there are shocks or sudden circumstance
present in the world of stocks.
III. References
Goh, K., Y. Wong and K. Kok, 2005. Financial crisis and intertemporal linkages across the Asean-5
stock markets. Review of Quantitative Finance and Accounting, 24(4): 359-377.
Granger, C.W., & Newbold, P., Spurious Regressions in Econometrics, Journal of Econometrics,
vol.2, 1974, pp.111-120.
Gujarati, D., and Porter, D. 2009 Basic Econometrics. Mcgraw Hill International Edition.
Lee, B. (1992). Causal relations among stock returns, interest rates, real activity, and inflation. The
Journal of Finance, 47 (4), 1591-1603.
Marshall, D. (1992). Inflation and asset returns in a monetary economy. Journal of Finance 47(4):
315-134.
Oxford Business Group. (2015). Philippine Stock Exchanges Winning Streak Continues. Retrieved
from http://www.bworldonline.com/content.php?section=Economy&title=philippine-stockexchange&8217s-winning-streak-continues&id=102228 April 24, 2015.
Pearce, D.K., and Roley, V.V. 1988. Firm Characteristics, Unanticipated Inflation, and Stock
Returns. Journal of Finance, 43, 965-981.
Rufino, C. (2008). Lagged Effect of TV Advertising on Sales of an Intermittently Advertised
Product. DLSU Business and Economics Review. pp. 1-1
Singh, A. Stock Markets, Financial Liberalisation and Economic Development, Economic Journal,
107(442), (1997), 771-782.
Sy, V. (2015) Philippine Stock Market: The Outperformer. PhilStar. Retrieved from
http://www.philstar.com/business/2015/02/09/1421594/philippine-stock-market-outperformer
April 24, 2015.
Van Nieuwerburgh, S., Buelens, F., and Cuyvers, L. 2006. Stock market development and
economic growth in Belgium, Explorations in Economic History. 43, 13-38.
Yule, G.U., Why Do We Sometimes Get Nonsense correlations between Time Series? A Study in
Sampling and the Nature of Time Series. Journal of the Royal Statistical Society, vol.89, 1926, pp164.
29 | P a g e
IV. Appendix
IV.1. Data
YEAR
30 | P a g e
GDP
SP
1987-1
170594.895
511.22
1987-2
187728.2873
918.41
1987-3
185543.401
753.14
1987-4
212604.045
816.21
1988-1
199493.6342
753.92
1988-2
216870.7827
844.21
1988-3
212433.4309
696.9
1988-4
256658.4881
839
1989-1
226158.7443
907.53
1989-2
244211.7449
1011.51
1989-3
248806.4303
1142.27
1989-4
306171.8162
1110.64
1990-1
271361.0215
1104.31
1990-2
282634.4603
890.85
1990-3
287461.8155
548.29
1990-4
352070.994
653.11
1991-1
316150.0356
1106.94
1991-2
331849.7446
1065.35
1991-3
334997.4422
943.35
1991-4
399740.6861
1154.26
1992-1
352426.6392
1105.73
1992-2
357751.4803
1566.87
1992-3
359785.6849
1421.14
1992-4
427500.4527
1272.4
1993-1
376632.1013
1471.34
1993-2
386271.3058
1593.41
1993-3
395574.7893
1998.9
1993-4
475151.3055
3241.86
1994-1
433015.8383
2711.5
1994-2
448523.8789
2746.36
1994-3
455828.6174
2908.24
1994-4
538321.265
2785.81
1995-1
480404.1064
2392.25
1995-2
498878.1388
2766.45
1995-3
521619.9931
2629.25
1995-4
610802.4659
2594.18
1996-1
555966.5205
2900.75
1996-2
578404.8163
3275.26
1996-3
595735.4247
3169.78
1996-4
676281.3903
3170.56
31 | P a g e
1997-1
617337.1319
3222.98
1997-2
645013.7972
2809.21
1997-3
657227.919
2057.39
1997-4
769139.0721
1869.23
1998-1
684272.7733
2238.42
1998-2
715521.2628
1760.13
1998-3
725015.9731
1259.64
1998-4
827952.0182
1968.78
1999-1
743848.7424
2028.21
1999-2
785964.561
2486.96
1999-3
799738.8157
2096.2
1999-4
914645.1348
2142.97
2000-1
819296.1476
1681.72
2000-2
865429.4684
1533.99
2000-3
889238.1814
1434.49
2000-4
1006750.466
1494.5
2001-1
888669.2157
1446.4
2001-2
943684.6298
1410.07
2001-3
967630.6923
1126.63
2001-4
1088816.819
1168.08
2002-1
958193.3026
1403.62
2002-2
1022497.495
1156.35
2002-3
1029339.437
1129.34
2002-4
1188315.104
1018.41
2003-1
1049455.451
1039.67
2003-2
1094331.305
1222.8
2003-3
1115617.659
1297.42
2003-4
1288697.282
1442.37
2004-1
1169103.684
1424.33
2004-2
1237189.435
1579.4
2004-3
1259312.808
1761.57
2004-4
1454829.365
1822.83
2005-1
1290345.155
1954.69
2005-2
1381750.338
1924.23
2005-3
1392203.211
1942.07
2005-4
1613450.934
2096.04
2006-1
1438607.864
2195.95
2006-2
1529160.537
2178.79
2006-3
1529278.914
2556.71
2006-4
1774110.045
2982.54
2007-1
1573656.99
3203.55
2007-2
1691199.598
3660.86
2007-3
1666597.363
3572.9
32 | P a g e
2007-4
1961267.291
3621.6
2008-1
1714032.339
2984.67
2008-2
1916133.351
2459.98
2008-3
1925077.244
2569.65
2008-4
2165660.348
1872.85
2009-1
1808557.097
1986.22
2009-2
1968887.803
2437.99
2009-3
1952870.171
2800.82
2009-4
2295828.216
3052.68
2010-1
2050543.625
3161.8
2010-2
2245796.978
3372.71
2010-3
2177534.19
4100.07
2010-4
2529605.199
4201.14
2011-1
2240295
4055.14
2011-2
2425070
4291.21
2011-3
2323064
3999.65
2011-4
2714904
4371.96
2012-1
2417567
5107.73
2012-2
2621037
5246.41
2012-3
2557943
5346.1
2012-4
2970789
5812.73
2013-1
2640471
6847.47
2013-2
2851032
6465.28
2013-3
2798245
6191.8
2013-4
3258443
5889.83
2014-1
2870780
6428.71
2014-2
3130768
6844.31
2014-3
3047633
7283.07
2014-4
3584882
7230.57