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Methodology: I. Adf and Phillips-Perron Tests

This document outlines the methodology used in a research paper. It involved 3 steps: (1) testing the stationarity of the data using ADF and Phillips-Perron tests; (2) analyzing causal relationships between variables using Granger causality tests; (3) estimating long-run relationships between variables using a Vector Autoregression (VAR) model. The last step was to test for cointegration between variables using the Johansen-Juselius approach to determine if long-term correlations exist.

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Rica Deguzman
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44 views2 pages

Methodology: I. Adf and Phillips-Perron Tests

This document outlines the methodology used in a research paper. It involved 3 steps: (1) testing the stationarity of the data using ADF and Phillips-Perron tests; (2) analyzing causal relationships between variables using Granger causality tests; (3) estimating long-run relationships between variables using a Vector Autoregression (VAR) model. The last step was to test for cointegration between variables using the Johansen-Juselius approach to determine if long-term correlations exist.

Uploaded by

Rica Deguzman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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METHODOLOGY

I. ADF AND PHILLIPS-PERRON TESTS


 The methodology started by testing the stationarity of the data series.
 So, the first method of this research paper was to examine if the data is a stationary time series
data or a non-stationary time series data.
 Data series are stationary if they do not have trend or seasonal effects. When a time series is
stationary, it can be easier to model. That’s why statistical modeling methods assume or require
the time series to be stationary in order to be effective.
 In contrast, a non-stationary time series show seasonal effects, trends, and other structures that
depend on the time index. This often results to a spurious regression problem or results in
nonsensically high correlation.
 Testing data for stationarity is very important in research where the underlying variables are
based on time. Moreover, many useful analytical tools and statistical tests and models rely on it.
 They tested all the data series for unit roots using the ADF or augmented Dickey–Fuller test AND
PHILLIPS-PERRON TESTS. Unit root is the basis if time series data is stationary or not. non-
stationary data are those with unit-root and on the other hand stationary data is characterized by
without having unit root.
II. GRANGER CAUSALITY TESTS
 In the second step, Granger Causality Test was used to measure the ability of predicting
the future values of a time series using past values of another time series.

 The causal relationships between variables were analyzed through the Granger causality tests.
 This is a statistical hypothesis test for determining whether one time series is useful for
forecasting another.
 A causal relationship exists when one variable in a data set has a direct influence on another
variable. Thus, one event triggers the occurrence of another event.
 For example, it can help determine if the students enrolled in tertiary education is helpful in
predicting the economic growth of a country. Or if there’s a direct or an indirect causality
between the number of students to the GDP per capita.

III. VAR MODEL


 The third step is to estimate the possible long- run relationship between the variables.
 VAR model is used for the analysis of multivariate time series.
 So what is multivariate? Multivariate time series has more than one time-dependent variable.
Each variable depends not only on its past values but also has some dependency on other
variables.
 Vector Autoregression (VAR) is a forecasting algorithm that can be used when two or more time
series influence each other.
 basic requirements in order to use VAR are:
1. You need at least two time series (variables)
2. The time series should influence each other.
 Why do we need it?
 To be able to understand the relationship between several components.
 To be able to get better forecasts.
 The purpose of their introduction is consistent with the Granger definition of
causality and it is related to the improvement of forecast accuracy by using a model
with interrelated variables.
 A Vector autoregressive (VAR) model is useful when one is interested in predicting multiple
time series variables using a single model.

 It is considered as an Autoregressive model because, each variable (Time Series) is
modeled as a function of the past values, that is the predictors are nothing but the lags
(time delayed value) of the series.
 This study will employ a VAR model or Vector autoregression model because this model makes
no assumptions of what variables are exogenous, considering that all variables are endogenous.
 An exogenous variable is a variable that is not affected by other variables in the system, In
contrast, an endogenous variable is one that is influenced by other factors in the system.
 used to capture the relationship between multiple quantities as they change over time.
 VAR model is used to determine the relationship among several variables.

3. JOHANSEN-JUSELIUS APPROACH
 The last step was to test the cointegration between the variables.

Cointegration is a technique used to find a possible correlation between time series processes in the
long term. Nobel laureates Robert Engle and Clive Granger introduced the concept of cointegration in
1987. The most popular cointegration tests include Engle-Granger, the Johansen Test, and the Phillips-
Ouliaris test.

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