Hitchhikers Guide to

EViews and Econometrics

January 2000
Byung-Joo Lee
Department of Economics
University of Notre Dame
Notre Dame, IN 466
ByungJoo!Lee!"#$n%!e%u
&4-6'#-6"'&
EViews Users Guide
This is a short guide to use EViews, the econometric software that we will use in this
course. EViews program is available on the campus cluster computers with windows
operating system installed. We do not have Macintosh version of this program installed
on the campus computers (Macintosh version is available for individual purchase directly
from the publisher).
Summary of the Program
EViews is a windows graphical interfaced statistical software. This program simplifies
many complicated statistical problems with a few simple mouse clics. !owever, this
program is also powerful enough to handle many state of the art econometrics problems.
This program is a successor of MicroT"# from the same company. This program handles
time$series analysis better than cross section data analysis. More fle%ible ma%imum
lielihood estimation procedure is one ma&or lacing point of EViews.
There are two ways to e%ecute this program. 'irst you can perform many statistical
functions with &ust using menu bar. (ou can also do the same tas using EViews
commands. We will use both ways to handle statistical problems.
Getting Started
When you start EViews program, EViews window appears. The first line in the window
is the tit(e )ar, labeled Econometrics Views. The second line is called the menu )ar
beginning with 'ile. Each one of the entries has its own submenu as you double clic
your mouse. They are very similar to standard windows menu bar items. Each of those
items will be e%plained later whenever necessary. There is a blan line right below the
menu bar, and it is called the comman% *in%o*. This is the area that you type in the
EViews command to perform statistical functions ()s * mentioned in the previous
section, you can &ust use menu bar to do the same tas). The main area is the *or+ area
that will display the results of statistical tass. Each result will have its own window and
as you perform multiple statistical tass, you will see several windows cascaded. (ou
can drag each window to different position for your own viewing convenience. The very
bottom line is the status (ine. This line is divided into three sections. The first one is a
message section (from EViews to users), the second section shows the default directory
that EViews will use to loo for data and program. (ou can change the default directory
by clicing the +pdate ,efault ,irectory in the directory setting window. The last
section displays the current wor file name. When you open EViews, this section shows
that wor file is untitled (because you did not name the wor file yet).
-
Introductory Session
This is an introductory session of EViews. This session only covers the most basic and
necessary tools that we need to perform minimal regression analysis. The ne%t section,
Econometric ,evie*, covers brief but fairly comprehensive topics of the most
commonly used econometric models.
We will practice an actual statistical analysis using small data set. *n this practice, * will
e%plain both using menu bar and EViews command. EViews command will be
boldfaced. .ur practice will appear as italics.
1. Begin EViews session and prepare for the workfile.
(ou need to create worfile for any EViews session. /lic on the -i(e.Ne*.
/or+fi(e. (Type 0,E12E in a command mode) ) dialog bo% appears to as the
fre0uency of data1 annual, semi$annual, 0uarterly, monthly, weely, daily or undated.
"elect appropriate fre0uency and enter the starting and end period of data. 'or
e%ample, in the start period area, type -234 for annual or -2341- for 0uarterly,
monthly or weely (you can use period instead of colon, e.g., -234.-). The end
period can be entered as -232 (annual), -23215 (0uarterly) or -2321-6(monthly), etc
(see step -- to enter data). 'or cross section data, choose none for data fre0uency and
enter 1 in the start period and n (number of sample si7e) in the end period. Then,
clic .8. 9ow the worfile appears (currently showing as worfile1+9T*T:E,)
and there are two variables already in the worfile1 /(constant) and resid(;esiduals).
2. Type in data for three series C!S" #!C$E and CP#.
To enter data manually, clic on 3uic+.Empty 4roup5E%it 6eries7. (Type D121).
<lan spreadsheet appears with the pre$specified fre0uency you entered in step -.
/lic in the gray cell to enter the series (variable) name. This window is called the
=roup within your own wor file. 'or each operation you do in your wor file, you
can name these as separate group or you can &ust discard to close the group windows.
(ou can use any )"/** characters up to > characters. "tart type in numeric data
immediately below the series name. Type /.9" (consumption) and press down
arrow (D121 08N6) and start to type in ?6@, ??@,A ,ata is at the end of this
e%ercise. )fter finishing cons, go to the ne%t column and in the gray area, type
*9/.ME and type in ?@4, ?35, ?>@,A ;epeat this for another series /#*. ((ou can
do all these three series at once by D121 08N6 IN089E 0:I).
*f you want to read a data from other file()"/** file, :otus B.W8?, or E%cel B.C:"),
clic on :roc;Import Data in the worfile menu. /hoose proper file format to read
in and select data file from your directory. (ou will have a data dialog window that is
asing the order of data (by observation or by series1 most data is arranged by
6
observation) and series names (if they donDt have names). *f data already have series
names, simply type in how many series in the data set. EViews will read in all
necessary data into the worfile. (ou can e%port selected series into any data file
format by clic on :roc;E<port Data in the worfile menu.
%. Sa&e and retrie&e your 'urrent working file.
When you are done entering all your data, you need to save your wor file so that you
can use it later. To save your woring file, clic on -i(e.6ave1s and give appropriate
file name (wor file has an automatic e%tension of B.wf-) and path for your own
(61=E filename). *n a later session when you need this wor file bac, you can
retrieve by -i(e.8pen and find your appropriate wor file (L81D filename).
(. Generate real &aria)les using nominal &aria)les and pri'e inde*.
9ote that /.9" and *9/.ME are nominal terms. *n order to use these variables in
real terms, we need to modify these variables into real terms. *n your current wor
file menu bar, there is a button for 4EN,. /lic 4EN, (4EN,), you will have a
window asing e0uation and sample period. Enter appropriate e0uations to change
nominal variables into real terms. Type ;/.9"(;eal consumption)E/.9"F/#* and
ad&ust for sample period. "ample period is already entered as the entire period. ,o
the same for ;*9/.ME (;eal income).
+. Print C!S" #!C$E" CP#" ,C!S" ,#!C$E.
*f you want to loo at your data, you can use 6>8/ command in the wor file menu
bar and type appropriate series name(s) (6>8/ 08N6 IN089E). 'or a single
series, you can &ust double clic on its series name in the worfile directory. 'or a
multiple series, highlight the entire series name in the worfile directory and clic
6>8/. (ou can type more than one series name in the series name window. (ou
can print using #;*9T menu in the wor group menu bar (:,IN2 08N6
IN089E).
-. Plot ea'h series separately and simultaneously.
(ou can a graph for a single or multiple series. (ou can also do this by =ie*.
4rap?ics under the =roup menu (This is only available under the View in the =roup
menu, where you see the actual list of series, for e%ample) (:L82 series name or
:L82 series-, series6). Each series is plotted using different color. (ou can mae
multiple graphs by choosing =ie*.9u(tip(e 4rap?s in the =roup menu.
?
.. /raw and print the s'atter diagram of ,C!S and ,#!C$E.
To see the relationship between two variables, you can draw a scatter diagram
between two variables (6012 08N6, IN089E, first variable in the vertical a%is
and the second one in the hori7ontal a%is). (ou can print this scatter diagram using
#;*9T command in the scatter diagram menu bar.
0. Cal'ulate the 'orrelation" 'o&arian'e and test the Granger 'ausality
)etween ,C!S and ,#!C$E.
(ou can obtain descriptive statistics of each variables using 3uic+.6eries 6tatistics
for single series or 3uic+.4roup 6tatistics for multiple series. (ou can obtain the
same statistics under the =ie*.Descriptive 6tats under the =roup menu. There are
eight statistics that you can obtain under the View menu such that descriptive
statistics, crosstab, correlations, covariances, correlogram, cross correlation,
cointegration test, =ranger causality.
1. Estimate the least s2uares regression of ,C!S on ,#!C$E with
inter'ept. 3lso estimate the same regression using nominal &aria)les.
*f you want to run regression of ;/.9" on ;*9/.ME with intercept, clic on
8)@ect.Ne* 8)@ect.EAuation (or 3uic+.Estimate EAuation). <efore you clic .8
button, you can (optionally) give the name for your .b&ect. *t is not necessary, but
this will mae it easier for you to refer to your estimated e0uation later. *n the
EAuation 6pecification window, you can type regression e0uation that you want to
estimate, and choose appropriate estimation method (:"1 :east "0uares, T":"1 Two
"tage :east "0uares for "imultaneous E0uation Estimation, );/!, :.=*T and
#;.<*T etc). 'or simple least s0uares, type ;/.9" / ;*9/.ME (L6 ,08N6 0
,IN089E) for regression of ;/.9"(,ependent Variable) on /(intercept) and
;*9/.ME(e%planatory variable).
14. Estimate the least s2uares regression of ,C!S on last year5s ,C!S"
,#!C$E with inter'ept.
*f you want to estimate the regression using different specification or different
estimation techni0ue or different sample period, repeat step 2 and modify appropriate
estimation option. (ou can also include lagged values in the regression by using
;/.9"($-) as one period lagged value of ;/.9" or ;*9/.ME($6) as two period
lagged value of ;*9/.ME.
5
11. The following is the dada set we used for this introdu'tory session.
(ear /ons *ncome /pi
-234 ?6@ ?@4 4.>>G
-23- ??@ ?35 4.>23
-236 ?@@ ?>@ 4.243
-23? ?G@ 54@ 4.2-G
-235 54- 5?> 4.262
-23@ 5?? 5G? 4.25@
-233 533 @-6 4.2G6
-23G 526 @5G -.444
-23> @?G @24 -.456
-232 @G3 3?4 -.42>
@
Data Handling
#! Data 2ransformation
(ou can transform most of data using 4EN, button in the worfile menu bar.
'ollowing are the most commonly used functions and operations.
H, $, B, F add, subtract, multiply and divide
I, J, E, JI =T, :T, e0ual and not e0ual
JE, EI :TE, =TE
)9,, .; :ogical .perator. (C )9, () is - if both are true
C6EBC2 ;aise to the #ower
:(EL84(C) 9atural :og Transformation
ECEEB:(C) E%ponential 'unction
)CE1B6(C) )bsolute Value
"KCE63,(C) "0uare ;oot
,ND, N,ND ;andom 9umber =enerator, +niform and 9ormal
;CE$IN=(C) *nverse or ;eciprocal of C
,CED(C) 'irst ,ifference of C, C(t)$C(t$-)
,nCED(C,n) n
th
.rder ,ifferencing, (-$:)
n
C, where : is a :ag .perator
:CEB5-#7 .ne :agged Value of C
2! Descriptive 6tatistics
$6U95B7 "um of C
$9E1N5B7 Mean of C
$=1,5B7 Variance of C
$08=5B,D7 /ovariance between C and (
$08,5B,D7 /orrelation between C and (
$DN8,95B7 "tandard 9ormal ,ensity 'unction of C
$0N8,95B7 /,' of "tandard 9ormal ;andom Variable
'! ,egression 6tatistics
*f you assign the name of your .b&ect for your regression, you can use the regression
name to retrieve various regression statistics. 'or e%ample, assume our regression
name is TE"T. Then, TE"TL;6 is an ;
6
value of the TE"T regression. *f you did
not assign regression name, L;6 refers to ;
6
value of the most recently estimated
e0uation.
L;6, L;<); ;
6
and ad&usted ;
6
L"E, L""; "tandard error of regression, sum of s0uared residual
L,W, L', L:.=: ,urbin$Watson, '$statistic, value of log$lielihood function
3
4! :oo(e% time-series an% cross section %ata
(ou need to assign names of the cross section members. 'or e%ample, assume that
you are analy7ing cross country study of income (, consumption /.9", interest rate
; and price level # for three countries, +", M)#)9 and /)9),). * assume that you
already have data read into the Worfile and their names are1 (+", (M#, (/),
/.9"+", /.9"M#, /.9"/), ;+", ;M#, ;/), #+", #M# and #/).
To obtain the #ooled regression window, clic 8)@ects.Ne* 8)@ect.:oo(, and you
will get :oo(e% Estimation window. *n the regression window, you have 0ross
6ection I%entifiersE 5Enter i%entifiers )e(o* t?is (ine7. Type +", M# and /) in
each line. 'or each series you defined before, you will have three series. 'or
e%ample, (N is (+", (M# and (/). "ame is true for all other variables /.9", ; and
#.
G
Econometric Review
This section provides a 0uic review of econometric techni0ue commonly used for many
empirical economic research pro&ects. !owever, this section does not intend to teach
econometric theory. Those who are interested in learning more econometric theory can
read =u&arati (-223)Ds Basic Econometrics, 3
rd
ed., or more advanced boo, Econometric
Analysis, 4
th
ed., by W. =reene (6444).
*n this section, * assume that data is already loaded and ready to use and all the variables
are defined. *f you are not familiar with this, go bac to the steps 6 and ? in previous
section. 'or EViews command, * will provide both menu bar and EViews command for
each operation whenever possible. Throughout this section, * will assume the following
regression model and variable notations. * also assume that you now how to interpret
regression output.
t t2 2 t ! t
u " # " # # $ + + + =
Dt (or Dt#, Dt2) is a dependent variable and Bt# and Bt2 are independent variables and

s
are parameters to estimate.
1. rdinary 6east S2uares 76S8 Estimation.
This is the most commonly and widely used estimation method when classical
assumptions of regression are all met. The classical assumptions are1
-)
( ) ! " u E
t t
=
6) t
"
and t
u
are uncorrelated,
( ) ! u " E
t t
=
?) Error terms are homosedastic, ( ) ( )
2
t
2
t t t
% " u E " u Var = =
5) There is no autocorrelation,
( ) ( ) ! " u u E " u & u 'ov
s t s t
= =
t t2 2 t ! t
u " # " # # $ + + + =
, ( )
2
t
% !& ( ) u
3uic+.Estimate EAuation ((ou have the e0uivalent menu 8)@ects.Ne* 8)@ects.
EAuation, and this is the same as throughout all regression procedure). =ive
appropriate regression name in the Name of 8)@ect window. /lic .8 to get
regression window and type D 0 B# B2 in the EAuation 6pecification window.
/hoose Least 6Auares in the Estimation 6ettings window. "pecify appropriate
sample period.
L6 D 0 B# B2
>
2. Generali9ed 6east S2uares 7G6S8 Estimation.
When the classical assumptions of regression are violated, we still can have
consistent estimates by .:", but we no longer have efficient estimators. To obtain
efficient estimators, we need to use various modifications of .:", collectively called
=:".
t t2 2 t ! t
u " # " # # $ + + + =
, ( ) ( )
2
t
" % !& ( ) u
2!#! /eig?te% Least 6Auares for >eteros+e%asticity!
*f you have a prior nowledge of the pattern of heterosedasticity, e.g.,
( )
2

2 2
" % " % = , then you can transform the heterosedasticity into
homosedasticity by dividing all variables by

" . This is called the weighted

least s0uares estimation.
3uic+.Estimate EAuation and type D 0 B# B2 in the EAuation 6pecification
window. /lic 8ptions button, and select /eig?te% L6;26L6 and type in
appropriate series name (e.g., B#) for weights in the /eig?t bo%.
2!2! >eteros+e%asticity 0onsistent 0ovariance 9atri<!
When the heterosedasticity structure is unnown, we can still estimate the
covariance matri% consistently by either WhiteDs or 9ewey$West
heterosedasticity consistent estimation method. *t is recommended that when
you suspect heterosedasticity problem, but you are not sure about the structure of
heterosedasticity.
3uic+.Estimate EAuation and type D 0 B# B2 in the E0uation "pecification
window. /lic 8ptions button, and select >eteros+e%asticity 0onsistent
0ovariance and choose either /?ite or Ne*ey-/est.
2!'! 1utocorre(ation 56eria( 0orre(ation7 pro)(em!
)utocorrelation problem arises when the error term follows autocorrelation
structure such that
t t t
* +u u + =

. *n the .:" regression output, if ,urbin$
Watson statistic is close to 4 or 5, we may suspect that there is the first order
autocorrelation problem. This model is estimated by /ochrane$.rcutt iterative
procedure and lose one lagged observation.
3uic+.Estimate EAuation and type D 0 B# B2 1,5#7 in the E0uation
"pecification window. /hoose Least 6Auares in the Estimation 6ettings
window. 'or higher order autocorrelation (h
th
), simply add 1,5?7, and we loose
lagged h observations.
2
L6 D 0 B# B2 1,5#7
L6 D 0 B# B2 1,5#7 1,527
;egression output reports parameter estimates of the model and the
autocorrelation parameters.
2!4! 1,I91 9o%e(!
When error term follows the general );*M)(p,4,0) structure such that
, t , t - t - t t
* . * . u + u + u

+ + + + + =
, we have the );*M) model.
3uic+.Estimate EAuation and type D 0 B# B2 1,5#7 915#7 in the E0uation
"pecification window. /hoose Least 6Auares in the Estimation 6ettings
window.
L6 D 0 B# B2 1,5#7 915#7
%. 3utoregressi&e Conditional :eteroskedasti'ity 77G83,C:8.
);/! model is similar to the );*M) model, but );/! model assumes the );*M)
relationship in the second moment, i.e., the conditional variance of
t
u
follows
autoregressive ();/!) andFor moving average (=);/!) components in
heterosedasticity structure. These models are fre0uently used to analy7e the
financial data where some periods of large price volatility (measured by the variance)
follows by the periods of relative tran0uility.
t t2 2 t ! t
u " # " # # $ + + + =
, ( )
t
2
t t
/ u E h

= 1 /onditional variance of
t
u
,
t
/
is the all available information set up to time (t-1).
'!#! 1,0>5p7
2
- t -
2
2 t 2
2
t ! t
u 0 111 u 0 u 0 0 h

+ + + + =
'!2! 41,0>5p,A7
, t , 2 t 2 t
2
- t -
2
2 t 2
2
t ! t
h # 111 h # h # u 0 111 u 0 u 0 0 h

+ + + + + + + + =
'!'! 1,0>-9 mo%e(
)llow the mean of a se0uence is a function of conditional variance. +seful model
to study asset maret.
t t t2 2 t ! t
u h 2 " # " # # $ + + + + =
, where t
u
follows );/!(p) model.
-4
'!4! 21,0>, E41,0>
These are variations of );/! to allow asymmetric nature of price volatility.
3uic+.Estimate EAuation and choose 1,0> in the Estimation 6ettings window.
Type your regression function as before in the 9ean EAuation 6pecification
window. /hoose appropriate settings for =);/!(p,0) (=);/!(-,-) is default) and
indicate whether you have );/!$M model or not. );/! is already selected in the
Estimation 6ettings window.
1,0>5p,A7 D 0 B# B2
'!! 2est for 1,0> 9o%e(
To test the e%istence of );/!, :agrange Multiplier (:M) test is often used. To
carry out this test, choose =ie*.,esi%ua( 2est.1,0> L9 2est from the main
windows menu bar.
(. Panel /ata 3nalysis 7Pooled Time Series and Cross Se'tion
,egression8.
4!#! :oo(e% 2ime 6eries an% 0ross 6ection
#ooled time series and cross section regression e0uation is as following1
it
3
it it
u # " $ + = .
,epending on the error structure of
it
u
, we can allow cross$sectional
heterosedasticity or cross$sectional correlation. To estimate this model, you
need to understand the way EViews handle the pooled data structure. ("ee the
previous section for pooled data handling).
To estimate this model, clic 8)@ects.Ne* 8)@ect.:oo(, and you will get :oo(e%
Estimation window. "pecify appropriate entries (dependent variable, sample
period and regressors). *n the ,egressors window, you need to specify which
variables have the common coefficients and which have different coefficients
(cross section specific coefficients). *n above model, we assume that all variables
have the same coefficients (no cross section specific coefficients). To allow cross$
sectional heterosedasticity, select 0ross section *eig?ts, and to allow cross$
sectional correlation, select 6U, estimation. 'or intercept choose either none or
common.
4!2! :ane( Data 1na(ysis
--
#anel data analysis is a special case of pooled time series and cross section data
analysis. This is often found in the longitudinal data structure where same
individual is followed over periods of time. Therefore, there may e%ist individual
specific effect (heterogeneity) constant over time. There are two ways to handle
this problem, fi%ed effect or random effect.
'i%ed Effect Model1
it
3
it i it
u # " 0 $ + + =
;andom Effect Model1
it i
3
it it
* u # " 0 $ + + + =
'i%ed effect assume the individual heterogeneity is e%plained by the different
intercept terms, while random effect handles this using random disturbance term
i
u which is constant through time. *n this model, we can specify that some
variable have a cross section specific coefficients.
To estimate the panel data regression, follow above instruction to obtain the
:oo(e% Estimation window and choose the -i<e% effects or ,an%om effects on
intercept term selection.
+. 6imited /ependent Varia)le 3nalysis 76ogit or Pro)it8.
:imited dependent variable analysis is appropriate when dependent variable taes
binary values (
! or $
t
=
). This analysis comes from the following model.
t t !
4
t
u " # # $ + + =
The latent variable (
4
t
$ ) is unobservable, but the binary variable t
$
is observed one
if
! u " # #
t t !
> + +
and 7ero otherwise. ,epending on the assumptions about the
error term, we define either :ogit model (
t
u
has a Weibull distribution) or #robit
model ( t
u
has a normal distribution). These models are estimated by ma%imum
lielihood estimation with numerical iteration (typically by 9ewton$;aphson or
<!!! method).
3uic+.Estimate EAuation and type D 0 B# B2 in the E0uation "pecification
window. /hoose Logit or :ro)it in the Estimation 6ettings window. "pecify
appropriate sample period.
L84I2 D 0 B# B2
:,8BI2 D 0 B# B2
-. !on;6inear 6east S2uares.
-6
EViews automatically applies nonlinear least s0uares to any e0uation that is nonlinear
in its coefficients. (ou can &ust specify nonlinear e0uation in the EAuation
6pecification window. 'or e%ample, if you want to estimate the /E" production
function with the following specification1
( ) { }
+

+
t
+
t t
5 . 6 . 7 $


+ =
, where
( ) + .& 7&
are parameters to be estimated.
3uic+.Estimate EAuation , and in the EAuation 6pecification window, type
( ) ( ) 8'9:;; 9 < 9='9:; 5< 4 '92; 9='9:;; 6< 4 '92; 4 '9; $ + = , where 0Ds are
parameters to be estimated nonlinearly. /hoose Least 6Auares in the Estimation
6ettings window.
.. !on;Stationary Time Series 3nalysis
Time series data { }
>
t t
y
=
is nonstationary if its autocorrelation coefficient (
+
, see
section to above) is one, i.e., this series e%plodes as time progresses and has no finite
variance. *f this is the case, we call that this series has a unit root (
+ =
), or in a
more technical notation,
I9; ) y
t
, which means that the series
t
y
has to be
differenced once to be stationary.
&!#! Unit ,oot 2est
=eneral unit root test proceeds as follows1 /onsider the following regression
model1 t t t
u y + y + =
. Testing the unit root hypothesis is e0uivalent to test to
see if
+ =
. This basic e0uation is modified to the following three e0uations.
t t t
t t t
t t t
u t # y . 0 ?y
u y . 0 ?y
u y . ?y
+ + + =
+ + =
+ =

This is the basic ,icey$'uller unit root test e0uation, and the testable hypothesis
is ! . = (i.e.,
+ =
, t
y
has a unit root). There are three different tables
depending on your testable e0uation (wF or wFo intercept andFor trend variable).
More general version of the original ,8 test is the )ugmented ,8 test (),') as
following.
t
@
-
- = t - t t
t
@
-
- = t - t t
t
@
-
- = t - t t
u ?y A t # y . 0 ?y
u ?y A y . 0 ?y
u ?y A y . ?y
+ + + + =
+ + + =
+ + =

=
+
=
+
=
+
*n the ),' test, we assume the error terms ( t
u
) are independent and have
constant variances. )lso, the lag length : in the regression e0uation is rather
-?
arbitrary. To overcome this problem, #hillips$#erron generali7ed ),' test as
following1
( )
t t t
t t
4
t
u 2 > = t # y . 0 y
u y . 0 y
+ + + =
+ + =

O O
O
Even though these e0uations loo simpler than ),' test, this test allows far more
general data generating process allowable by the ),' test. <oth tests use the
same critical values.
"elect the series you want to test unit root, and double clic (or =ie*.6?o*) the
series to get the series window. /lic =ie*.Unit ,oot 2est and choose
appropriate options (),' or #hillips$#erron, and appropriate e0uation for unit
root test).
&!2! =ector 1utoregression 5=1,7
V); is a system of stationary time series variables. Each e0uation has the same
right$hand side variables consisting of e%ogenous variables and the lagged values
of all endogenous variables in the system. This system is often used to determine
the causality (=ranger$causality) between variables. This system is also useful to
investigate the e%ternal shoc effects on the endogenous variables using impulse
response function.
2t 2: t 22 t 2 2! t
t : t 2 t ! t
u t # B # $ # 0 B
u t # B # $ # 0 $
+ + + + =
+ + + + =


8)@ects.Ne* 8)@ect.=1, and select appropriate entries. 'or V); specification,
choose Unrestricte% =1, and specify Endogenous and E%ogenous variables.
)lso specify lag length and sample period.
&!'! 0ointegration
When time series variables are non$stationary, it is interesting to see if there is a
certain common trend between those non$stationary series. *f two non$stationary
series
I9; ) $ I9;& ) "
t t
has a linear relationship such that
t t t
$ # " 0 m B + + =
and
I9!; ) B
t
, ( t
B
is stationary), then we call the two
series t
"
and t
$
are cointegrated. Two broad approaches to test for the
cointegration are Engel and =ranger (-2>G) and Mohansen (-2>>). <roadly
speaing, cointegration test is e0uivalent to e%amine if the residuals of regression
between tow non$stationary series are stationary. 'or Engel$=ranger test, regress
t
$
on t
"
(or vice versa), and use the residual to see if it is stationary (unit root
test described above). *f it is stationary, two series t
"
and t
$
are cointegrated.
Mohansen uses more complicated V); structure to test the cointegration. EViews
use Mohansen test for cointegration.
-5
*n a multiple non$stationary time series, it is possible that there is more than one
linear relationship to form a cointegration. This is called the cointegration ran.
'or cointegration test, select the series (group of variables) to test cointegration to
obtain group window. /hoose =ie*.0ointegration 2est and specify appropriate
settings for testing. The setting is whether you want to specify intercept andFor
linear deterministic time trend in the cointegration e0uation.
&!4! Error 0orrection 9o%e(
*f two or more non$stationary time series are cointegrated, then there e%ists an
Error /orrection Model (E/M). /ointegration is a necessary condition for E/M.
E/M describes the long run e0uilibrium relationship between non$stationary
series. Even though individual series are non$stationary, when they are
cointegrated, there is a long run e0uilibrium relationship, and E/M e%plains this
relationship.
2t t 2 t 22 t 2 2 t
t t t 2 t t
u B ?$ . ?" . m ?$
u B ?$ . ?" . m ?"
+ + + + =
+ + + + =

E/M is similar to V);, but the original series are non$stationary and they are
cointegrated. To estimate E/M, follow the same path as V); estimation.
8)@ects.Ne* 8)@ect.=1, and select appropriate entries. 'or V); specification,
choose =ector Error 0orrection, and specify appropriate cointegration e0uation
(i.e., wF or wFo intercept andFor deterministic time trends).
0. System of E2uations
When we have more than one e0uations to estimate together, we will use additional
information from other e0uations to improve the efficiency of parameter estimates.
"!#! 6eeming(y Unre(ate% ,egression
t t2 2 t ! t
u " # " # # $ + + + =
t t2 22 t 2 2! t
u2 "2 # "2 # # $2 + + + =
( ) $2 $&
are dependent variables and
( ) "2 "&
s are independent variables.
Error terms
( ) u2 u&
are contemporaneously correlated, i.e.,
! u2; cov9u&
.
.:" estimators are still consistent, but they are not efficient.
8)@ects.Ne* 8)@ects.6ystem and you can give the name of the system in the
Name for 8)@ect bo% for later use. /lic 8F and then you will have a blan
6ystem window. Type your e0uations for such that (-E/(-)H/(6)B C-H/(?)BC6
for first e0uation and (6E/(5)H/(@)B C?H/(3)BC5, etc. /lic Estimate and
choose 6eeming(y Unre(ate% ,egression for "+; model. "ince "+; estimation
-@
involves numerical iteration, you can choose appropriate number of iterations and
convergence criteria in the 8ptions button.
"!2! 6imu(taneous EAuation 6ystem
t t 2 t ! t
u $2 . " # # $ + + + =
t t 2 t 2 2! t
u2 $ . "2 # # $2 + + + =
This e0uation system is different from "+; model in a sense that the dependent
variables appear in the right hand side of each e0uation. <ecause of this
endogeneity problem, simple .:" of each e0uation will yield inconsistent
estimators. To estimate this simultaneous e0uation system, each e0uation should
fist satisfy identification condition of order condition and ran condition.
"!2!#! 2*o 6tage Least 6Auares 526L67!
This is one of the most often used estimation methods for simultaneous
e0uation. The first stage of the T":" estimation involves the estimation of all
endogenous variables on all e%ogenous variables in the system and some other
instrumental variables. The second stage is the least s0uares estimation of the
structural e0uations using the estimated values of the endogenous variables
from the first stage. The structural parameters are estimated in each e0uation
separately.
"!2!2! 2?ree 6tage Least 6Auares 5'6L67
?":" is more efficient estimation procedure than T":" in the sense that ?":"
estimates entire structural parameters all at once. The first two stages of ?":"
is e0uivalent to the T":", but ?":" uses T":" estimates to estimate co$
variance structure of entire system. +sing the estimated co$variances of the
system, the final stage (the third stage) is the =:" estimation method of the
entire system. This method is more efficient than T":".
To use either one of above estimation method, clic 8)@ects.Ne* 8)@ect.6ystem
as above for "+; estimation. *n the 6ystem window, type in only the behavioral
e0uations. <ehavioral e0uations are the ones with structural parameters to
estimate. *gnore any other identities in the system. Type your e0uations for such
that (-E/(-)H/(6)B (6H/(?)BC- for first e0uation and (6E/(5)H/(@)B
(-H/(3)BC6, etc. "ince this is T":" or ?":" estimation, you need to specify
instrumental variables for the first stage estimation. )fter the structural e0uations,
you need to specify which variables to use as instrumental variables. 'or T":"
and ?":", you need all e%ogenous variables in the system for the instrumental
variables. Type IN62 B# B2. /onstant is automatically included as an
instrumental variable. /lic Estimate in the 6ystem menu bar. (ou will have a
choice of different estimation methods. /hoose either 2*o 6tage Least 6Auares
or 2?ree 6tage Least 6Auares.
-3
"!'! 4enera(iGe% 9et?o% of 9oment 54997 Estimation
=MM estimation is relatively new estimation techni0ue in econometrics and it is
intuitively appealing because of its wea assumptions of estimation process. This
is one e%ample of growing literature of semi$parametric estimation methods.
=MM uses the sample analog of population orthogonality condition to estimate
parameters. 'or e%ample, if the e%ogenous variable ( t
"
) is independent of
random disturbance term ( t
u
), then we have the population orthogonality
condition
( ) ! u " E
t t
=
. Then, we have
( ) ! " u E
t t
=
and
( ) ( ) ! " g u E
t t
= for
any function of
g
. 'rom this population orthogonality condition, we can form
sample analogs of population orthogonality conditions such that
! u
>

>
t
t
=

=
and
! " u
>

>
t
t t
=

=
, where t ! t t
" # # $ u =
. These are called the sample
moments, and we estimate the population parameters by minimi7ing the following
criteria function
( ) # S
.
( )
> >
3
>
m C m # S = , where

=
=
>
t
t t
>
t
t
>
" u
>

u
>

m , and
>
C is a weighting matri%
defined as
( ) ( ) [ ]

3
> >
# m # m

.
EViews provides =MM estimation method in the system of e0uation estimation.
'ollow the same step as above for T":" (?":"). Type appropriate estimation
e0uations and instrumental variables list, then choose 499. ,epending on the
data structure, choose appropriate method either for heterosedasticity or
autocorrelation problem.
-G