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Time Series
Regression
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Logarithm:
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A. Notation
Yt = value of Y in period t.
Data set: {Y1,,YT} are T observations on
the time series variable Y
We consider only consecutive, evenlyspaced observations (for example, monthly,
1960 to 1999, no missing months)
missing and unevenly spaced data introduce
technical complications
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AUTOCORRELATION
(Serial Correlation):
follows the laws of multiple
regressors heteroskedasticity
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t = t1 + ut
The magnitude of indicates the strength of the
serial correlation:
If is zero, there is no serial correlation
As approaches one in absolute value, the previous
observation of the error term becomes more important in
determining the current value of t and a high degree of
serial correlation exists
For to exceed one is unreasonable, since the error term
effectively would explode
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Figure 9.1b
Positive Serial Correlation
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Figure 9.2
No Serial Correlation
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Positive or
Negative Serial Correlation
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Positive or
Negative Serial Correlation
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2.
3.
Yt=B0+B1X1T+B2X2T+B3Yt-1+ui
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The DurbinWatson
d Test (cont.)
The equation for the DurbinWatson d statistic for T
observations is:
(9.10)
where the ets are the OLS residuals
There are three main cases:
1. Extreme positive serial correlation: d = 0
2. Extreme negative serial correlation: d 4
3. No positive serial correlation: d 2
2011 Pearson Addison-Wesley. All rights reserved.
9-31
The DurbinWatson
d Test (cont.)
To test for positive (note that we rarely, if ever, test for
negative!) serial correlation, the following steps are required:
1. Obtain the OLS residuals from the equation to be tested
and calculate the d statistic by using Equation 9.10:
The DurbinWatson
d Test (cont.)
3. Set up the test hypotheses and decision rule:
H0: 0 (no positive serial correlation)
HA: > 0 (positive serial correlation)
if d < dL
Reject H0
if d > dU
Do not reject H0
if dL d dU
Inconclusive
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The DurbinWatson
d Test (cont.)
3. Set up the test hypotheses and decision rule:
H0: = 0
HA: 0
(serial correlation)
if d < dL
Reject H0
if d > 4 dL
Reject H0
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https://www3.nd.edu/~wevans1/econ30331/
Durbin_Watson_tables.pdf
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InGrwtht=B0+B1InRaint+B2Tempt+ut
1. What sign to you expect each coefficient to have ?
2. Your results are:
InGrwtht=1.2+.07InRaint+.03Tempt , R2=.48
(.07)
(.003)
(.02)
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(.003)
(.02)
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Remedy 2: NeweyWest
Standard Errors
Not all corrections for pure serial correlation involve Generalized
Least Squares (GLS does not do well in small samples)
NeweyWest standard errors take account of serial correlation
by correcting the standard errors without changing the
estimated coefficients
The logic begin NeweyWest standard errors is powerful:
If serial correlation does not cause bias in the estimated
coefficients but does impact the standard errors, then it
makes sense to adjust the estimated equation in a way that
changes the standard errors but not the coefficients
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DYNAMIC MODELS
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(12.2)
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12-
(12.2)
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12-
(12.2)
(12.8) 2 = 20
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12-
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12-
(12.2)
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(12.2)
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Yt 0 0 X t Yt1 ut
(12.3)
Yt 0 0 X t Yt1 ut
(12.3)
12-
Yt 0 0 X t Yt1 ut
GDPt = 0 + 0MSt + 1GDPt1 + ut
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12-
Yt 0 0 X t Yt1
ut
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12-
12-
InGrwtht=B0+B1InRaint+B2Tempt+B3InGrwtht-1+ut
1. What sign to you expect each coefficient to have ?
2. Your results are:
InGrwtht=1.3+.11InRaint+.19Tempt-.01InGrwtht-1, R2=.48
(.07)
(.003)
(.02)
(.003)
(.02)
(.003)
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(.02)
(.003)
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instrumental variables:
substituting an instrument (a variable that is highly correlated with YM
but is uncorrelated with ut) for Yt: in the original equation effectively
eliminates the correlation between Ytl and ut
Problem: good instruments are hard to come by (more in Ch 12)
modified GLS:
Technique similar to the GLS procedure we learned
Potential issues: sample must be large and the standard
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Granger Causality
Granger causality, or precedence, is a circumstance
in which one time series variable consistently and
predictably changes before another variable
A word of caution: even if one variable precedes
(Granger causes) another, this does not mean that the
first variable causes the other to change
There are several tests for Granger causality
They all involve distributed lag models in one form or
another, however
Well discuss an expanded version of a test originally
developed by Granger
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12-
t1
ut
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STATIONARITY
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12-
Yt1 + vt
(12.22)
GDPt =
GDPt1 + vt
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GDPt = GDPt1 + vt
This is a random walk: the expected value of Yt does
not converge on any value, meaning that it is
nonstationary
This circumstance, where = 1 in Equation 12.23 (or
similar equations), is called a unit root
If a variable has a unit root, then Equation 12.23
holds, and the variable follows a random walk and is
nonstationary
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12-
GDPt1 + vt
(12.26)
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12-
(12.27)
where 1 = 1
Note: alternative Dickey-Fuller tests additionally
include a constant and/or a constant and a trend term
2. Set up the test hypotheses:
H0: 1 = 0 (unit root)
HA: 1 < 0 (stationary)
Copyright 2015 Pearson Education, Inc. All rights reserved.
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12-
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12-
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(0.014)
+ 0.269ln(GDPt1) + 0.178ln(GDPt2)
(0.069)
(0.070)
DF t-statstic = 2.18
Note that the standard t-table does not apply to
DickeyFuller tests
Dont compare this to 1.96 use the Dickey-Fuller
table!
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NON
STATIONARITY AND
COINTEGRATION
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Cointegration
If the DickeyFuller test reveals nonstationarity, what
should we do?
The traditional approach has been to take first
differences (Y = Yt Yt1 and X = Xt Xt1) and use them
in place of Yt and Xt in the regressions
Issue: the first-differencing basically throws away
information about the possible equilibrium
relationships between the variables
Alternatively, one might want to test whether the timeseries are cointegrated, which means that even though
individual variables might be nonstationary, its possible for
linear combinations of nonstationary variables to be
stationary
Copyright 2015 Pearson Education, Inc. All rights reserved.
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Cointegration (cont.)
To see how this works, consider Equation 12.24:
(12.24)
Assume that both Yt and Xt have a unit root
Solving Equation 12.24 for ut, we get:
(12.30)
In Equation 12.24, u t is a function of two nonstationary
variables, so u t might be expected also to be nonstationary
Cointegration refers to the case where this is not the case:
Yt and Xt are both non-stationary, yet a linear combination
of them, as given by Equation 12.24, is stationary
How does this happen?
This could happen if economic theory supports Equation
12.24 as an equilibrium
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Cointegration (cont.)
We thus see that if Xt and Yt are cointegrated then OLS
estimation of the coefficients in Equation 12.24 can
avoid spurious results
To determine if Xt and Yt are cointegrated, we begin with
OLS estimation of Equation 12.24 and calculate the OLS
residuals:
(12.31)
Next, perform a Dickey-Fuller test on the residuals
Remember to use the critical values from the DickeyFuller Table!
If we are able to reject the null hypothesis of a unit root
in the residuals, we can conclude that Xt and Yt are
cointegrated and our OLS estimates are not spurious
Copyright 2015 Pearson Education, Inc. All rights reserved.
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AUTOREGRESSION
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4. Autoregressions
(SW Section 14.3)
A natural starting point for a forecasting model is to
use past values of Y (that is, Yt1, Yt2,) to forecast Yt.
An autoregression is a regression model in which Yt
is regressed
against its own lagged values.
The number of lags used as regressors is called the
order of the autoregression.
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GDPGR
t = 1.991 + 0.344GDPGRt1
R2
(0.349)
(0.075)
= 0.11
Is the lagged growth rate of GDP a useful
predictor of the current growth rate of GDP?
1. t = 0.344/.075 = 4.59 > 1.96 (in absolute value)
2. Reject H0: 1 = 0 at the 5% significance level
3. Yes, the lagged growth rate of GDP is a useful of
2
R
the current growth ratebut the
is pretty low.
Copyright 2015 Pearson Education, Inc. All rights reserved.
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GDPGR
t = 1.991 + 0.344GDPGRt1
R2
(0.349)
(0.075)
= 0.11
Is the lagged growth rate of GDP a useful
predictor of the current growth rate of GDP?
1. t = 0.344/.075 = 4.59 > 1.96 (in absolute value)
2. Reject H0: 1 = 0 at the 5% significance level
3. Yes, the lagged growth rate of GDP is a useful of
2
R
the current growth ratebut the
is pretty low.
Copyright 2015 Pearson Education, Inc. All rights reserved.
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GDPGR
t
R2
(0.08)
(0.08)
= 0.14
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T
T
First term: always decreasing in p (larger p, better fit)
BIC
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T
T
BIC(p) ln SSR ( p ) ( p 1) ln T
T
T
=
The penalty term is smaller for AIC than BIC (2 <
lnT)
AIC estimates more lags (larger p) than the BIC
This might be desirable if you think longer lags
might be important.
However, the AIC estimator of p isnt consistent
it can overestimate p the penalty isnt big
enough
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BIC
1.095
1.067
0.955
0.957
0.986
1.016
1.046
AIC
1.076
1.030
0.900
0.884
0.895
0.906
0.918
R2
0.000
0.056
0.181
0.203
0.204
0.204
0.204
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(0.08)
(0.43)
R 2 0.17
F-statistic for coefficients on lags of TSpread:
F = 4.43 (p-value = 0.01)
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ln T
SSR ( K )
ln
K
T
T