Advance Econometrics Techniques &

Forecasting

Topic:
Times Series Econometrics
By:
Zaheer Khan
Kamroon Taj
To:
Dr. M. Afzal
 Time Series Econometrics

Time series is a sequence of data points, measured

typically at successive time spaced at uniform time
intervals.
Example of Time Series:
Daily stock prices, Exchange rate, CPI, GDP, etc.
 Time Series Analysis

Time series analysis is distinct from the other data

analysis problem in which there is no natural
observation
A time series model will generally reflect the fact
that observation close together in time will be more
closely related then the observations further apart
 Time Series Types

Time Series analysis is divided into two main category.

Linear Analysis
Non Linear Analysis
 Linear Analysis Model

Linear analysis three major model are mostly used.

1. AR (Auto-Regressive Integrated 1)
2. MA (Moving Average Model)
3. ARMA (Auto-Regressive Moving Average)
4. ARIMA (Auto-Regressive Integrated Moving
Average)
 Non-Linear Analysis Model
In time series econometrics for Non-linear analysis
following model for used
1. ARCH
2. GARCH
3. TARCH
4. EGARCH
5. FIGARCH
6. CGARCH
 Time Series Test
For the analysis of time sequence data in econometrics
following tests are used.
Stationarity
Unit Root
Correlogram
Co-integration
Causality
 Stationarity

A time series is stationary if its mean and variance

do not vary systematically over time
 Stationarity

Mean E(Yt) = µ
Variance var(Yt) = E(Yt- µ)² = σ²
Covariance γk = E[(Yt-µ)(Yt+k-µ)]
 Stationarity

For econometrics analysis data must be stationary,

which should be check through graphical analysis.
 Unit Root

A test of Stationarity which help to widely used for

the major purpose of time series econometrics
(stationarity of data)
 Unit Root

Ho=ρ=1
Data is non-stationary
This hypothesis is going to be tested
 Correlogram

Its known as the auto-correlation plot which is mostly

used to check the randomness of data
 Correlogram

1. Shows that the data is random

2. Is the observed time series are auto-regressive
3. Is the time series are white-noise
4. Is an observation related to the adjacent observation
 Co-integration

If two or more series are individually integrated

but some linear combination of them has a low
order of integration then the series are said to be
co-integrated
 Causality

Is the relationship between an event (the cause)

and a second event (the effect) where the second
event is the consequences of the first event
Quarters GDP PDI PCE PROFITS DIVIDENDS
1970-1 2872.8 1990.6 1800.5 44.7 24.5
1970-2 2860.3 2020.1 1807.5 44.4 23.9
1970-3 2896.6 2045.3 1824.7 44.9 23.3
1970-4 2873.7 2045.2 1821.2 42.1 23.1
1971-1 2942.9 2073.9 1849.9 48.8 23.8
1971-2 2947.4 2098 1863.5 50.7 23.7
1971-3 2966 2106.6 1876.9 54.2 23.8
1971-4 2980.8 2121.1 1904.6 55.7 23.7
1972-1 3037.3 2129.7 1929.3 59.4 25
1972-2 3089.7 2149.1 1963.3 60.1 25.5
1972-3 3125.8 2193.9 1989.1 62.8 26.1
1972-4 3175.5 2272 2032.1 68.3 26.5
1973-1 3253.3 2300.7 2063.9 79.1 27
1973-2 3267.6 2315.2 2062 81.2 27.8
1973-3 3264.3 2337.9 2073.7 81.3 28.3
1973-4 3289.1 2382.7 2067.4 85 29.4
1974-1 3259.4 2334.7 2050.8 89 29.8
1974-2 3267.6 2304.5 2059 91.2 30.4
1974-3 3239.1 2315 2065.5 97.1 30.9
1974-4 3226.4 2313.7 2039.9 86.8 30.5
1975-1 3154 2282.5 2051.8 75.8 30
1975-2 3190.4 2390.3 2086.9 81 29.7
1975-3 3249.9 2354.4 2114.4 97.8 30.1
1975-4 3292.5 2389.4 2137 103.4 30.6
1976-1 3356.7 2424.5 2179.3 108.4 32.6
1976-2 3369.2 2434.9 2194.7 109.2 35
1976-3 3381 2444.7 2213 110 36.6
1976-4 3416.3 2459.5 2242 110.3 38.3
1977-1 3466.4 2463 2271.3 121.5 39.2
1977-2 3525 2490.3 2280.8 129.7 40
1977-3 3574.4 2541 2302.6 135.1 41.4
1977-4 3567.2 2556.2 2331.6 134.8 42.4
1978-1 3591.8 2587.3 2347.1 137.5 43.5
1978-2 3707 2631.9 2394 154 44.5
1978-3 3735.6 2653.2 2404.5 158 46.6
1978-4 3779.6 2680.9 2421.6 167.8 48.9
1979-1 3780.8 2699.2 2437.9 168.2 50.5
1979-2 3784.3 2697.6 2435.4 174.1 51.8
1979-3 3807.5 2715.3 2454.7 178.1 52.7
1979-4 3814.6 2728.1 2465.4 173.4 54.5
1980-1 3830.8 2742.9 2464.6 174.3 57.6
1980-2 3732.6 2692 2414.2 144.5 58.7
1980-3 3733.5 2722.5 2440.3 151 59.3
1980-4 3808.5 2777 2469.2 154.6 60.5
1981-1 3860.5 2783.7 2475.5 159.5 64
1981-2 3844.4 2776.7 2476.1 143.7 68.4
1981-3 3864.5 2814.1 2487.4 147.6 71.9
1981-4 3803.1 2808.8 2468.6 140.3 72.4
1982-1 3756.1 2795 2484 114.4 70
1982-2 3771.1 2824.8 2488.9 114 68.4
1982-3 3754.4 2829 2502.5 114.6 69.2
1982-4 3759.6 2832.6 2539.3 109.9 72.5
1983-1 3783.5 2843.6 2556.5 113.6 77
1983-2 3886.5 2867 2604 133 80.5
1983-3 3944.4 2903 2639 145.7 83.1
1983-4 4012.1 2960.6 2678.2 141.6 84.2
1984-1 4089.5 3033.2 2703.8 155.1 83.3
1984-2 4144 3065.9 2741.1 152.6 82.2
1984-3 4166.4 3102.7 2754.6 141.8 81.7
1984-4 4194.2 3118.5 2784.8 136.3 83.4
1985-1 4221.8 3123.6 2824.9 125.2 87.2
1985-2 4254.8 3189.6 2849.7 124.8 90.8
1985-3 4309 3156.5 2893.6 129.8 94.1
1985-4 4333.5 3178.7 2895.3 134.2 97.4
1986-1 4390.5 3227.5 2922.4 109.2 105.1
1986-2 4387.7 3281.4 2947.9 106 110.7
1986-3 4412.6 3272.6 2993.7 111 112.3
1986-4 4427.1 3266.2 3012.5 119.2 111
1987-1 4460 3295.2 3011.5 140.2 108
1987-2 4515.3 3241.7 3046.8 157.9 105.5
1987-3 4559.3 3285.7 3075.8 169.1 105.1
1987-4 4625.5 3335.8 3074.6 176 106.3
1988-1 4655.3 3380.1 3128.2 195.5 109.6
1988-2 4704.8 3386.3 3147.8 207.2 113.3
1988-3 4734.5 3407.5 3170.6 213.4 117.5
1988-4 4779.7 3443.1 3202.9 226 121
1989-1 4809.8 3473.9 3200.9 221.3 124.6
1989-2 4832.4 3450.9 3208.6 206.2 127.1
1989-3 4845.6 3466.9 3241.1 195.7 129.1
1989-4 4859.7 3493 3241.6 203 130.7
1990-1 4880.8 3531.4 3258.8 199.1 132.3
1990-2 4900.3 3545.3 3258.6 193.7 132.5
1990-3 4903.3 3547 3281.2 196.3 133.8
1990-4 4855.1 3529.5 3251.8 199 136.2
1991-1 4824 3514.8 3241.1 189.7 137.8
1991-2 4840.7 3537.4 3252.4 182.7 136.7
1991-3 4862.7 3539.9 3271.2 189.6 138.1

1991-4 4868 3547.5 3271.1 190.3 138.5

Macro-economic data of USA from 1970-
1-1991-4

This is the quarterly data of five major

macro-economic variable which is used for the
application of time series econometrics
 Application of Time Series
Econometrics

This have following steps to analysis the time series

econometrics
1. Graphical analysis
2. Correlogram
3. Unit Root Test
4. Co-intergration Test
5. Causality Test
6. Chow Break Test
 OLS Estimation
Dependent Variable: LNGDP

Method: Least Squares

Date: 12/03/10 Time: 03:12

Sample: 1970Q1 1991Q4

Included observations: 88

Variable Coefficient Std. Error t-Statistic Prob.  

LNPCE 1.034618 0.115599 8.950079 0.0000

LNPDI 0.093431 0.097578 0.957501 0.3411

LNPROF 1.203905 0.167793 7.174936 0.0000

LNDVD 1.471257 0.624542 2.355738 0.0208

C 719.2762 99.79221 7.207739 0.0000

R-squared 0.997318     Mean dependent var 3865.606

Adjusted R-squared 0.997189     S.D. dependent var 630.0349

S.E. of regression 33.40619     Akaike info criterion 9.910500

Sum squared resid 92625.81     Schwarz criterion 10.05126

Log likelihood -431.0620     F-statistic 7715.573

Durbin-Watson stat 0.478548     Prob(F-statistic) 0.000000

 OLS Estimation

From the above result shows that only PDI is

insignificant while the other variables are significant.
It also point out that the problem of hetroscedasticity
and auto-correlation occurred in the observed data
Dependent Variable: LNGDP  
Method: Least Squares  
Date: 12/06/10 Time: 03:07  
Sample (adjusted): 1970Q2 1991Q4  
Included observations: 87 after adjustments  

Convergence achieved after 10 iterations  

 
 

Variable Coefficient Std. Error t-Statistic Prob.  

 
 

 
LNPCE 0.817576 0.124656 6.558656 0.0000

 
LNPDI 0.301080 0.094193 3.196406 0.0020

 
LNPROF 1.387688 0.262312 5.290212 0.0000

 
LNDVD 1.406317 1.100136 1.278312 0.2048

 
C 666.7647 187.3353 3.559205 0.0006

 
AR(1) 0.789442 0.069469 11.36394 0.0000
 
 

 
R-squared 0.998912     Mean dependent var 3877.017

 
Adjusted R-squared 0.998845     S.D. dependent var 624.4732

 
S.E. of regression 21.22632     Akaike info criterion 9.014833

 
Sum squared resid 36495.09     Schwarz criterion 9.184895

 
Log likelihood -386.1452     F-statistic 14870.78

 
Durbin-Watson stat 2.007510     Prob(F-statistic) 0.000000
 
 
Inverted AR Roots       .79  
 
 
When White test apply along with AR1 this
will reduce the problem of cross products
but still it shows the problem of
autocorrelation
Graphicall Analysis
Correlogram
To check the randomness of the data Q-
statistics is apply which plot the
autocorrelation
Correlogram
Interpretation
 Unit Root Test
The graphicall analysis shows that the data is not stationary,
for this the Unit Root Test(ADF) is apply, on the integrated
order 1.
Stationarity of data is the necessary condition of the time
series analysis.
 Unit Root Test
The unit root test shows that the data is stationary at the first
order integration
In the observed data after applying the unit root test the data
become stationary
Graphical Analysis
After the test apply there is the visual view of the stationarity
of data.
Which is obtained by plotting the residual of the observation
 Residual

This is the graphical analysis of the residual which shows that

data is stationary
Co-integration
It shows that the variable have a long run relationship among
each other

On the observed data co-integration is apply for this purpose

we many test are used but Engle Granger test is apply to check
the relationship of the observed data.

Our Ho= No Co-integration in the data

Calculated values shows that at the level of 5% our Ho is
Rejected .
Casuality Test
To check the casuality of the observed data a test of Granger
Casuality is used
Chow Break Test
For the structural stability of the observed data a test of chow
break is used in the above data

For this test there must be an a point of break which is

necessary for this 1982 is our break point for the above data
Our Ho is that there is no structural stability in the data is
going to be tested
While the result shows that the calculated F-statistics is grater
then the critical value of F which is 2.63.
This should reject our Ho that there is no structural stability
The maximum log like hood ratio shows that distribution with
DOF (m-1)*(k+1) is rejected the null hypothesis, because our
critical value 9.49 is less then the calculated value.

Ho is rejected which mean the results are statistically significant

and there is a structural stability in the data