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Group Members

7550-FMS/MBA/F16 Azam
Khan
7470-FMS/MBA/F16 Adnan
7549-FMS/MBA/F16 Umar daraz
7100- FMS/MBA/F15 Fahim ur
Rahman
7531-FMS/MBA/F16 Saddam
Hussain
INTRODUCTION
Currency outside Depository Corporations:
The currency deposits and debt securities
categories shown under issued by sector other
than resident depository corporations are
applicable to the broad money definitions in an
even smaller number of economies.
Continued
Transferable Deposits:
Transferable deposits comprises all types of deposits
that are exchangeable on demand at par without
penalty or restrictions, also transferable deposits
are freely transferable by cheque or original order
or otherwise commonly used to make payments
Continued
Securities Other Than Shares
Securities other than shares consist of bills, bonds,
certificates 0f deposit, commercial paper,
debentures and similar instruments normally
traded in the financial market.
These may be have some maturity date and some
maturity value and may also have a face value.
METHODOLOGY
Data:
The data has been extracted from the International
Financial Statistics (IFS). We took data of Pakistani
Market, Yearly data has been used (1971-2010) i.e.
data of forty years.
Continued
Techniques
R Square
Adjusted R Square
T-Stat
F-state
Ordinary Least Square (OLS)

It is a method for estimating the unknown


parameters in alinear regression model, with the
goal of minimizing the sum of the squares of the
differences between the
observedresponses(values of the variable being
predicted) in the givendatasetand those
predicted by a linear function of a set
ofexplanatory variables.
Assumption of OLS
Linearity
The parameter should be linear mean the power of variable should
be one
Y=o+1X1+2X2+
Xt has some variation
There must be some variation in the value of independent variable.
Expected(mean) value of distributed term is zero
The mean of the error term must be equal to zero.
Homoscedasticity
Variance of the error term should be same, if it is different then
there is a heterocedasticity problem.
Mathematically: Var(X) = 2
Continued
No Autocorrelation:
All the error term should be independent to each other .there should be no
auto correlation.
Mathematically; Cov(ijX)=0fori
Normality of residuals
Error terms should be normally distributed. The mean of the error term
should be zero .the residual must be normally distributed with the mean
zero and constant variance.
Multicolinearity:
There should be least association between the independent variable.
N>K
Number of observation must be greater than numbers of parameters
estimated .number of observation must be greater than independent
variable.
Multicolinearity

When independent variables have linear relationship but


the OLS assumption is (there will be no linear
relationship among the explanatory variables.
CLRM requires that there are no exact linear
relationships among the explanatory/independent
variables (the Xs).

So, when explanatory variables are highly correlated to


each other (correlation coefficients either very close to 1
or to -1), the problem of multicollinearity occurs.
Detecting of Imperfect
Multicolinearity:
Simple correlation co-efficient: If there is high
correlation among the regressor/independent variables
there will be multicolinearity.
High R2 with insignificant co-efficient:
Variance Inflating Factor (VIF): It is also a measure of
multicolinearity, higher the R2 will lead to higher VIF that
indicates the higher degree of multicolinearity. VIF= 1/1-R 2
Tolerance (ToL): When multicolinearity is higher than
tolerance will be smaller. ToL=1/VIF
Easiest way to measure the extent of multicollinearity is
simply to look at the matrix of correlations between the
individual variables
Resolving Multicollinearity

drop one of the collinear variables


go out and collect more data, for example
use a longer run of data
switch to a higher frequency
Heteroskedasticity
Hetero (different or unequal) is the opposite of homo (same or
equal)Skedastic means spread or scatter
Homoskedasticity = equal spread
Heteroskedasticity = unequal spread
When variance of error term is not constant but (assumption 5 of
the CLRM states that the disturbances should have a constant
(equal) variance independent of t:
Var(ut)=2
Therefore, having an equal variance means that the disturbances
are homoskedastic.
If homoskedasticity assumption is violated then
Var(ut)=t2
Consequences of Heteroskedasticity

OLS estimators are not BLUE. Heteroskedasticity


affects the variance of (Co-efficient of
explanatory variable/s) and therefore making the
OLS estimators inefficient
T & F-tests are misleading means underestimates
the variances of the estimators, leading to higher
values of t and F statistics
Detecting Heteroskedasticity
The first is the informal way which is done through
graphs and therefore we call it the graphical
method.
Scatter plot of residual square (u2t) and both
variables (dependent & independent).
If values seem constant then there will be no
heteroskedasticity.
Continued
Numerical methods:
ARCH method
White test
F-Stats and p- values are the decision criteria
of heteroskedasticity
Autocorrelation

There should be no co-variance /correlation among


the disturbance term of two different time periods.
Assumption 6 of the CLRM states that the covariance
and correlations between different disturbances are
all zero:
cov(ut, us)=0
This assumption states that the disturbances ut and us
are independently distributed, which is called serial
independence.
Dummy Variables

Types of dummy variables.


1.Intercept Dummy Variable
2.Slope Dummy variable
3.Combine Dummy Variable
Results


Variable Coefficient Std. Error t-Statistic Prob.

SECURITIES_OTHER_THAN_SH 52.22439 40.18214 1.299692 0.2017


TRANSFERABLE_DEPOSITS 0.468836 0.015551 30.14863 0.0000
C 13205.57 11244.77 1.174375 0.2477


R-squared 0.970134 Mean dependent var 178747.7
Adjusted R-squared 0.968519 S.D. dependent var 362240.4
S.E. of regression 64271.59 Akaike info criterion 25.05166
Sum squared resid 1.53E+11 Schwarz criterion 25.17833
Log likelihood -498.0332 Hannan-Quinn criter. 25.09746
F-statistic 600.9272 Durbin-Watson stat 0.846765
Prob(F-statistic) 0.000000


Interpretation of OLS

Here the T- State value of 1 (SOTS) is 1.299692


which is insignificant as according to the rule of
thumb of t-state which means that Ho will be
accepted and H1 will be rejected.
The Value of 2 is higher than the rule of thumb of
t-state (+_1.96) which is 30.14863 so here it is
significant which means we will accept H1 and
reject Ho
OVERALL MODEL SIGNIFICANCY
Here the significance of overall model will be find
through F-state P value for which the rule of
thumb is 5% so here the value of F state P value is
0.846765 which shows that it is insignificant so Ho
will be accepted and H1 will be rejected and
hence overall model is insignificant.
Table2



Coefficient Uncentered Centered
Variable Variance VIF VIF

SECURITIES_OTHER_T
HAN_SH 1614.604 1.310494 1.269473

TRANSFERABLE_DEPO
SITS 0.000242 1.552061 1.269473
C 1.26E+08 1.224399 NA


Multicolinearity

Interpretation of Multicolinearity:
There is no multicolinearity in our model because
the centered VIF is less than 3 (1.269473). Also
determined by Correlation that its value is less
than 0.7(0.460729128).
Table3


F-statistic 47.46325 Prob. F(1,37) 0.0000
Obs*R-squared 21.91565 Prob. Chi-Square(1) 0.0000



Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 05/11/17 Time: 16:32
Sample (adjusted): 2 40
Included observations: 39 after adjustments

HAC standard errors & covariance (Bartlett kernel, Newey-West fixed


bandwidth = 4.0000)


Variable Coefficient Std. Error t-Statistic Prob.


C 9.80E+08 7.99E+08 1.226950 0.2276
RESID^2(-1) 0.749626 0.125216 5.986665 0.0000


R-squared 0.561940 Mean dependent var 3.91E+09
Adjusted R-squared 0.550100 S.D. dependent var 8.76E+09
S.E. of regression 5.88E+09 Akaike info criterion 47.87640
Heteroskedasticity Test: ARCH
Here the decision criteria is based on P value
(0.000) which less than rule of thumb 0.05 so
hence there is heteroskedasticity. It means that it
is significance so we will select H1.

Table4
F-statistic 28.25755 Prob. F(4,35) 0.0000
Obs*R-squared 30.54247 Prob. Chi-Square(4) 0.0000
Scaled explained SS 65.57434 Prob. Chi-Square(4) 0.0000



Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 05/11/17 Time: 16:33
Sample: 1 40
Included observations: 40
HAC standard errors & covariance (Bartlett kernel, Newey-West fixed
bandwidth = 4.0000)
Collinear test regressors dropped from specification


Variable Coefficient Std. Error t-Statistic Prob.


C 5.32E+08 2.75E+08 1.934682 0.0611
SECURITIES_OTHER_THAN_SH^2 -19263.23 21854.13 -0.881446 0.3841
SECURITIES_OTHER_THAN_SH*TRANSFERABLE_DE
POSITS 13.07513 19.33143 0.676366 0.5033
TRANSFERABLE_DEPOSITS^2 -0.016823 0.005727 -2.937350 0.0058
TRANSFERABLE_DEPOSITS 41903.67 11571.74 3.621208 0.0009

Heteroskedasticity Test: White
Here the decision criteria is based on F state P
value. So here the value of F state P value is
0.0000 so hence we will accept H1(significant)
which means there is heteroskedasticity and reject
Ho.
Breusch-Godfrey Serial Correlation LM Test:


F-statistic 12.01699 Prob. F(2,35) 0.0001
Obs*R-squared 16.28485 Prob. Chi-Square(2) 0.0003



Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 05/18/17 Time: 16:27
Sample: 1 40
Included observations: 40
Presample missing value lagged residuals set to zero.


Coefficien
Variable t Std. Error t-Statistic Prob.


SECURITIES_OTHER_THAN_
SH 60.86804 34.72001 1.753111 0.0883
TRANSFERABLE_DEPOSITS -0.009218 0.012687 -0.726526 0.4723
AUTOCORELLATION
There is autocorrelation problem overhere as the P
value is 0.00001 which means that we will accept
H1 as it is significant.
Here Durbin Watson value is 2.25 but we know
that this test may give inconclusive results.
Removal of autocorrelation
Here is the problem of auto correlation so we
removed the autocorrelation by Ar1 and Ar 2.
Dummy variables

Here is the P values in both cases is greater than


o.o5 so it means that our model is insignificance.
We accept H0 and reject H1.

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