Regression Arima Garch Var Model

Forecasting using Regression,
ARIMA and VAR Models
Submitted to Prof. Sajal Ghosh for partial fulfillment of Part Time

PGPM Oct 2011 batch
Modeling and Forecasting in Energy and Financial
Markets
Submitted by:
Manish Jindal (11PT2-36)
1. Regression
Input Data Used (from E-Views Database):
Table 7.3
Real Gross Product, Labor Days and Real Capital Input in the
Agricultural Sector, Taiwan, 1958-1972
YEAR = Year
Y = Real Gross Product, Millions of NT $
X2 = Labor Days, Millions of Days
X3 = Real Capital Input, Millions of NT $
YEAR
Y
1958 16607.7
1959 17511.3
1960 20171.2
1961 20932.9
1962 20406.0
1963 20831.6
1964 24806.3
1965 26465.8
1966 27403.0
1967 28628.7
1968 29904.5
1969 27508.2
1970 29035.5
1971 29281.5
1972 31535.8
X2
275.5
274.4
269.7
267.0
267.8
275.0
283.0
300.7
307.5
303.7
304.7
298.6
295.5
299.0
288.1
X3
17803.7
18096.8
18271.8
19167.3
19647.6
20803.5
22076.6
23445.2
24939.0
26713.7
29957.8
31585.9
33474.5
34821.8
41794.3
E-views Output for multiple linear regression model:

ls y c x2 x3
Dependent Variable: Y
Method: Least Squares
Date: 04/24/13 Time: 17:39
Sample: 1958 1972
Included observations: 15
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
X2
X3
-28067.17
147.9362
0.403563
9432.066
36.44344
0.073561
-2.975718
4.059338
5.486131
0.0116
0.0016
0.0001
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
0.909559
0.894485
1583.279
30081287
Management Development Institute
Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Page 2
24735.33
4874.173
17.74924
17.89085
October, 2011 PT-PGPM
Log likelihood
Durbin-Watson stat
-130.1193
1.039019
F-statistic
Prob(F-statistic)
60.34143
0.000001
Analysis:
High R-squared and Adjusted R-squared indicate a good explanatory power of the
model.
t-test (Probability values < 0.05) indicates that both Labour Days (X2) and Real Capital
Input (X3) are significant in explaining the variability of the explained variable, Real
GDP.
Also, F-test (probability value < 0.05) indicates that the model as a whole is significant.
However, the Durbin-Watson stat value of 1.039 is in the doubtful range and therefore,
serial correlation LM test is performed to make sure no auto correlation exists in the
model. Lag order of 1 is used for LM test. The outcome is given below:
Serial Correlation LM Test:

Breusch-Godfrey Serial Correlation LM Test:
F-statistic
Obs*R-squared
1.237281
1.516612
Probability
Probability
0.289714
0.218133
Test Equation:
Dependent Variable: RESID
Date: 04/24/13 Time: 18:00
Presample missing value lagged residuals set to zero.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
X2
X3
RESID(-1)
3243.336
-12.76956
0.016801
0.333779
9784.721
37.87033
0.074393
0.300071
0.331469
-0.337192
0.225839
1.112331
0.7465
0.7423
0.8255
0.2897
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.101107
-0.144045
1567.854
27039844
-129.3199
1.437784
Mean dependent var

S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
Page 3
-1.36E-11
1465.832
17.77598
17.96480
0.412427
0.747397
Here, the Null hypothesis is that no auto correlation exists in the model. A probability of
0.21 and 0.28 are greater than the threshold of 0.05, therefore, Null Hypothesis of No
Auto Correlation existing is accepted.
Check for Multicollinearity:

Correlation Matrix:
X2
X2
1.000000
X3
0.620523
X3
0.620523
1.000000
Correlation between X2 and X3 is found to be 0.620523 which is not high enough to

indicate a multicollinearity problem existing in the model. Therefore, the model can now
be used for forecasting.
The final regression model used for forecasting is as follows:

Y = -28067.16664 + 147.9362123*X2 + 0.4035625699*X3
Forecasting using the model:

36000
Forecast: YF
Actual: Y
Forecast sample: 1958 1972
32000
28000
Root Mean Squared Error

Mean Absolute Error
Mean Abs. Percent Error
Theil Inequality Coefficient
Bias Proportion
Variance Proportion
Covariance Proportion
24000
20000
16000
1416.128
1100.348
5.169292
0.028143
0.000000
0.023694
0.976306
12000
58 59 60 61 62 63 64 65 66 67 68 69 70 71 72
YF
Theil Inequality Coefficient of 0.023 is quite close to zero, which indicates a near perfect
fit of the model for forecasting purpose.
Page 4
2. ARIMA
Input Data Used peak demand.xls:
peak demand.xls
E-views Output for correlogram:

Date: 06/23/13 Time: 14:59
Sample: 2000M04 2008M07
Autocorrelation
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Partial Correlation
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AC
1
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10
11
12
13
14
15
16
17
18
19
20
21
22
23
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25
26
27
28
29
30
0.970
0.940
0.910
0.880
0.850
0.820
0.791
0.761
0.731
0.702
0.673
0.643
0.614
0.586
0.557
0.528
0.500
0.472
0.444
0.416
0.389
0.361
0.334
0.308
0.281
0.255
0.229
0.204
0.179
0.154
Page 5
PAC
Q-Stat
Prob
0.970
-0.015
-0.015
-0.015
-0.015
-0.015
-0.015
-0.015
-0.015
-0.015
-0.015
-0.016
-0.015
-0.016
-0.015
-0.016
-0.015
-0.016
-0.015
-0.015
-0.016
-0.015
-0.015
-0.016
-0.015
-0.016
-0.015
-0.016
-0.015
-0.016
96.941
188.91
275.99
358.29
435.90
508.94
577.50
641.71
701.67
757.52
809.38
857.38
901.64
942.30
979.50
1013.4
1044.1
1071.8
1096.6
1118.6
1138.1
1155.2
1170.0
1182.7
1193.5
1202.4
1209.8
1215.7
1220.3
1223.7
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
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34
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0.130
0.106
0.082
0.059
0.036
0.013
-0.015
-0.015
-0.016
-0.015
-0.015
-0.016
1226.2
1227.9
1228.9
1229.4
1229.6
1229.7
0.000
0.000
0.000
0.000
0.000
0.000
The correlogram shows signature of AR(1) process, however, it could be an illusion until
stationarity of the series is confirmed.
Performing the ADF Unit Root test for check of

stationarity:
ADF unit root test output at level:
Null Hypothesis: DEMAND has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic based on SIC, MAXLAG=11)
Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level
t-Statistic
Prob.*
-3.370152
-4.073859
-3.465548
-3.159372
0.0626
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation

Dependent Variable: D(DEMAND)
Date: 06/23/13 Time: 15:03
Sample (adjusted): 2000M05 2007M02
Included observations: 82 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
DEMAND(-1)
C
@TREND(2000M04)
-0.249099
4861.437
29.69826
0.073913
1432.497
9.602382
-3.370152
3.393681
3.092802
0.0012
0.0011
0.0027
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.125876
0.103747
896.1555
63444484
-672.2702
1.724296
Mean dependent var

S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
Page 6
104.3415
946.6032
16.47000
16.55806
5.688110
0.004922
The probability value of >5% indicates that H0 of unit root present is accepted at 5%
critical level and therefore, ADF Unit root test is done again on first difference with the
following outcome:
Null Hypothesis: D(DEMAND) has a unit root

Exogenous: Constant

1% level
5% level
10% level
t-Statistic
Prob.*
-7.571975
-3.524233
-2.902358
-2.588587
0.0000

Dependent Variable: D(DEMAND,2)
Date: 06/23/13 Time: 15:08
Variable
Coefficient
Std. Error
t-Statistic
Prob.
D(DEMAND(-1))
D(DEMAND(-1),2)
D(DEMAND(-2),2)
D(DEMAND(-3),2)
D(DEMAND(-4),2)
D(DEMAND(-5),2)
D(DEMAND(-6),2)
D(DEMAND(-7),2)
D(DEMAND(-8),2)
D(DEMAND(-9),2)
C
-4.811954
3.506694
3.219195
2.809151
2.374129
2.039335
1.665176
1.228536
0.815078
0.463414
579.9569
0.635495
0.574176
0.511100
0.456585
0.408596
0.353954
0.295530
0.244074
0.190846
0.121058
122.9400
-7.571975
6.107346
6.298564
6.152531
5.810456
5.761583
5.634549
5.033460
4.270875
3.828023
4.717396
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0001
0.0003
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.692708
0.642332
811.8135
40201512
-578.5425
1.980756
Mean dependent var

S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
Page 7
-1.263889
1357.426
16.37618
16.72401
13.75081
0.000000
The H0 of unit root is now rejected and therefore, the series is considered I(1)
Checking the correlogram with first difference series for

trend and seasonality:
Trend component is added in the first difference series series dd=d(demand, 1,0) and
correlogram checked with following outcome:
Date: 06/23/13 Time: 15:14

Sample: 2000M04 2008M07
Autocorrelation
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Partial Correlation
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1
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10
11
12
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14
15
16
17
18
19
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21
22
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25
26
27
28
29
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AC
PAC
Q-Stat
Prob
0.030
0.016
-0.111
-0.199
-0.112
-0.134
-0.165
-0.131
-0.042
-0.094
0.352
0.252
0.260
0.003
-0.123
-0.151
-0.099
-0.090
0.006
-0.129
-0.195
0.103
0.098
0.308
0.156
-0.022
-0.084
-0.044
-0.074
-0.083
0.030
0.015
-0.112
-0.195
-0.106
-0.147
-0.229
-0.243
-0.200
-0.353
0.085
0.079
0.167
-0.016
-0.046
-0.090
-0.020
-0.005
0.169
-0.036
-0.146
-0.018
-0.053
0.057
0.035
-0.049
-0.038
0.062
0.075
-0.096
0.0747
0.0967
1.1721
4.6597
5.7834
7.4030
9.9096
11.508
11.675
12.528
24.557
30.822
37.577
37.578
39.137
41.512
42.558
43.427
43.431
45.292
49.592
50.814
51.932
63.234
66.175
66.234
67.111
67.359
68.075
68.979
0.785
0.953
0.760
0.324
0.328
0.285
0.194
0.175
0.232
0.251
0.011
0.002
0.000
0.001
0.001
0.000
0.001
0.001
0.001
0.001
0.000
0.000
0.001
0.000
0.000
0.000
0.000
0.000
0.000
0.000
Page 8
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31
32
33
34
35
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-0.050
-0.110
-0.077
0.079
0.061
0.221
-0.055
0.009
-0.039
0.173
-0.061
0.034
69.315
70.994
71.830
72.732
73.273
80.603
0.000
0.000
0.000
0.000
0.000
0.000
Nothing can be derived from the correlogram regarding AR and MA components so

trying with the seasonal component (with 12 as seasonality): Series dd=d(demand,0,12)
Date: 06/23/13 Time: 15:15

Sample: 2000M04 2008M07
Autocorrelation
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Partial Correlation
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1
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15
16
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18
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AC
PAC
Q-Stat
Prob
0.486
0.475
0.380
0.340
0.303
0.222
0.088
0.132
0.246
0.072
0.174
-0.142
0.062
0.043
0.051
0.031
0.096
0.141
0.195
0.177
0.008
0.145
0.071
0.125
0.063
0.092
0.058
0.106
0.021
-0.123
0.486
0.313
0.101
0.063
0.050
-0.041
-0.166
0.054
0.266
-0.152
0.085
-0.398
0.201
0.058
0.093
0.072
0.069
0.072
-0.022
-0.053
-0.047
0.001
0.124
-0.146
0.095
0.020
-0.062
-0.028
-0.084
-0.158
17.479
34.414
45.423
54.342
61.572
65.492
66.118
67.557
72.615
73.050
75.652
77.429
77.767
77.939
78.178
78.271
79.151
81.100
84.903
88.092
88.098
90.326
90.864
92.584
93.038
94.015
94.406
95.760
95.812
97.721
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
Page 9
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31 -0.151 -0.118 100.68 0.000

32 -0.237 -0.112 108.16 0.000
This correlogram shows an indication of AR(2), SMA(12) process. Confirming the

significance of ar(1), ar(2) and sma(12) using regression
Confirming AR and MA components from the

correlogram:
ls d(demand,0,12) c ar(1) ar(2) sma(12)
Dependent Variable: D(DEMAND,0,12)
Date: 06/23/13 Time: 15:18
Convergence achieved after 12 iterations
Backcast: 2000M06 2001M05
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
AR(1)
AR(2)
MA(12)
1701.522
0.471909
0.287270
-0.854022
214.0576
0.118750
0.117415
0.041146
7.948896
3.973966
2.446625
-20.75597
0.0000
0.0002
0.0171
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
Inverted AR Roots
Inverted MA Roots
0.605499
0.587291
708.8503
32660470
-548.7379
2.055818
.82
.99
.49-.85i
-.49+.85i
Mean dependent var

S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
-.35
.85+.49i
-.00-.99i
-.85+.49i
.85-.49i
-.00+.99i
-.85-.49i
1484.377
1103.399
16.02139
16.15090
33.25499
0.000000
.49+.85i
-.49-.85i
-.99
All 3 processes are showing significance at 5% confidence level. Confirming whether the
Residual is white Noise of not.
Date: 06/23/13 Time: 15:20

Sample: 2001M06 2007M02
Page 10
Q-statistic
probabilities
adjusted for 3 ARMA
term(s)
Autocorrelation
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Partial Correlation
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**| .
.|.
. |*.
.*| .
. |**
.*| .
. |*.
.|.
. |*.
.|.
.*| .
.|.
. |*.
.|.
.*| .
.*| .
.*| .
.*| .
. |*.
. |*.
.|.
.|.
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
AC
PAC
Q-Stat
Prob
-0.043
-0.075
0.052
-0.022
0.006
-0.029
-0.203
-0.011
0.138
-0.097
0.182
-0.119
0.043
0.037
0.035
-0.047
-0.066
-0.029
0.133
0.000
-0.227
0.016
-0.109
-0.007
0.047
0.025
-0.017
0.136
-0.043
-0.077
0.046
-0.024
0.012
-0.035
-0.205
-0.038
0.114
-0.075
0.199
-0.145
0.070
-0.051
0.073
-0.016
-0.078
0.004
0.125
-0.044
-0.150
-0.075
-0.108
-0.079
0.076
0.080
-0.006
0.050
0.1322
0.5457
0.7499
0.7863
0.7892
0.8565
4.1276
4.1382
5.6902
6.4719
9.2745
10.488
10.650
10.772
10.885
11.092
11.508
11.587
13.319
13.319
18.556
18.583
19.848
19.854
20.096
20.169
20.202
22.401
0.375
0.674
0.836
0.389
0.530
0.459
0.486
0.320
0.312
0.385
0.463
0.539
0.603
0.646
0.710
0.649
0.715
0.420
0.484
0.467
0.530
0.577
0.632
0.685
0.612
Confirmed that the residuals components are white noise; so proceeding with forecasting:
Forecasting using the model:

Outcome of the static forecasting:
Page 11
34000
Forecast: DEMANDF
Actual: DEMAND
Forecast sample: 2000M04 2008M07
Adjusted sample: 2001M06 2007M03
32000
30000
28000

Mean Absolute Error
Bias Proportion
Variance Proportion
26000
24000
22000
20000
18000
2001
2002
2003
2004
2005
687.9972
588.4692
2.420978
0.013758
0.013140
0.020256
0.966604
2006
DEMANDF
Outcome of dynamic forecasting:

36000
Forecast: DEMANDF
Actual: DEMAND
Forecast sample: 2007M01 2008M07
34000
32000

Mean Absolute Error
Bias Proportion
Variance Proportion
30000
28000
26000
07M01
07M04
07M07
07M10
08M01
08M04
08M07
DEMANDF
MAPE is between 1% and 3%, which is good enough so model can be used for forecasting.
Page 12
358.5803
358.5267
1.239447
0.006235
0.999701
0.000299
0.000000
3. VAR
Input Data Used sensex_ex_oil_VAR.xls:
sensex_ex_oil_VAR.
xls
Stationarity test for all the three series:
ADF Unit Root Test for Sensex:
Null Hypothesis: SEN has a unit root

Exogenous: Constant, Linear Trend

1% level
5% level
10% level
t-Statistic
Prob.*
-1.535520
-3.972503
-3.416877
-3.130796
0.8165

Dependent Variable: D(SEN)
Date: 06/23/13 Time: 15:54
Sample (adjusted): 2 639
Variable
Coefficient
Std. Error
t-Statistic
Prob.
SEN(-1)
C
@TREND(1)
-0.008067
134.9426
0.037049
0.005254
66.52498
0.087721
-1.535520
2.028450
0.422351
0.1252
0.0429
0.6729
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.007247
0.004121
229.2660
33377444
-4371.235
1.896014
Mean dependent var

S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
Page 13
12.91376
229.7398
13.71233
13.73330
2.317821
0.099321
The H0 of unit Root present is accepted with 81% probability; Now doing ADF Unit Root
test with 1st difference:
Null Hypothesis: D(SEN) has a unit root

Exogenous: Constant

1% level
5% level
10% level
t-Statistic
Prob.*
-24.00601
-3.440387
-2.865860
-2.569128
0.0000

Dependent Variable: D(SEN,2)
Date: 06/23/13 Time: 15:55
Variable
Coefficient
Std. Error
t-Statistic
Prob.
D(SEN(-1))
C
-0.950156
11.79015
0.039580
9.107445
-24.00601
1.294562
0.0000
0.1959
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.475765
0.474939
229.4970
33444735
-4365.524
1.998825
Mean dependent var

S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
-0.517582
316.7176
13.71279
13.72678
576.2883
0.000000
H0 is rejected with first difference and therefore, the series is considered I(1) and
therefore, d(sen) will be used for further analysis.
Similarly, other 2 series, namely ex and oil are also found I91) in nature and therefore,
d(ex) and d(oil) will be used for further analysis.
Vector Auto Regression test:
Page 14
Outcome with lag 2

Vector Autoregression Estimates
Date: 06/23/13 Time: 15:59
Standard errors in ( ) & t-statistics in [ ]
DLOG(SEN)
DLOG(OIL)
DLOG(EX)
DLOG(SEN(-1))
0.062916
(0.03938)
[ 1.59786]
0.041426
(0.05878)
[ 0.70476]
-0.007926
(0.01270)
[-0.62406]
DLOG(SEN(-2))
-0.047235
(0.03926)
[-1.20309]
0.069754
(0.05861)
[ 1.19016]
-0.032615
(0.01266)
[-2.57540]
DLOG(OIL(-1))
0.027833
(0.02660)
[ 1.04652]
-0.046923
(0.03970)
[-1.18187]
0.000759
(0.00858)
[ 0.08852]
DLOG(OIL(-2))
-0.046258
(0.02550)
[-1.81390]
-0.019528
(0.03807)
[-0.51295]
-0.012440
(0.00823)
[-1.51229]
DLOG(EX(-1))
-0.043623
(0.12249)
[-0.35613]
-0.018486
(0.18286)
[-0.10110]
-0.032198
(0.03951)
[-0.81489]
DLOG(EX(-2))
-0.461301
(0.12216)
[-3.77614]
0.051077
(0.18236)
[ 0.28008]
-0.061351
(0.03940)
[-1.55695]
0.000873
(0.00063)
[ 1.39264]
0.001302
(0.00094)
[ 1.39148]
-4.56E-05
(0.00020)
[-0.22567]
0.033549
0.024330
0.154639
0.015680
3.639180
1743.907
-5.461973
-5.412938
0.000889
0.005954
-0.003529
0.344605
0.023406
0.627866
1489.092
-4.660667
-4.611632
0.001300
0.018689
0.009328
0.016089
0.005058
1.996506
2463.518
-7.724899
-7.675864
-9.69E-05
R-squared
Adj. R-squared
Sum sq. resids
S.E. equation
F-statistic
Log likelihood
Akaike AIC
Schwarz SC
Mean dependent
Page 15
S.D. dependent
0.015874
0.023365
Determinant resid covariance (dof adj.)

Determinant resid covariance
Log likelihood
Akaike information criterion
Schwarz criterion
3.43E-12
3.32E-12
5698.165
-17.85272
-17.70561
0.005081
The lag length criteria output is as follows:
VAR Lag Order Selection Criteria

Endogenous variables: DLOG(SEN) DLOG(OIL)
DLOG(EX)
Exogenous variables: C
Date: 06/23/13 Time: 16:01
Sample: 1 639
Lag
LogL
LR
FPE
AIC
SC
HQ
0
1
2
3
4
5
6
7
8
5655.428
5658.995
5675.220
5697.734
5703.470
5711.659
5715.384
5721.169
5727.525
NA
7.088918
32.09070
44.31307*
11.23404
15.96324
7.225424
11.16626
12.20586
3.23e-12
3.29e-12
3.21e-12
3.08e-12*
3.11e-12
3.12e-12
3.17e-12
3.20e-12
3.23e-12
-17.94421
-17.92697
-17.94991
-17.99281*
-17.98244
-17.97987
-17.96312
-17.95292
-17.94452
-17.92304*
-17.84229
-17.80172
-17.78111
-17.70723
-17.64115
-17.56089
-17.48718
-17.41527
-17.93599*
-17.89408
-17.89234
-17.91058
-17.87554
-17.84830
-17.80689
-17.77201
-17.73895
* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion
The lag length 3 is selected by the criterion and therefore, it will be used for further
analysis.
Cointegration Test:
The Johansen and Jeselius cointegration test is performed to validate the existence of
any cointegration between variables with the following outcome:
Page 16
Date: 06/23/13 Time: 16:06

Trend assumption: Linear deterministic trend
Series: DLOG(SEN) DLOG(OIL) DLOG(EX)
Lags interval (in first differences): 1 to 3
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
No. of CE(s)
None *
At most 1 *
At most 2 *
Eigenvalue
Trace
Statistic
0.05
Critical Value
Prob.**
0.272322
0.234106
0.147925
472.1336
270.5869
101.4914
29.79707
15.49471
3.841466
0.0001
0.0001
0.0000
Trace test indicates 3 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
No. of CE(s)
Eigenvalue
Max-Eigen
Statistic
0.05
Critical Value
Prob.**
None *
At most 1 *
At most 2 *
0.272322
0.234106
0.147925
201.5467
169.0955
101.4914
21.13162
14.26460
3.841466
0.0001
0.0001
0.0000
Max-eigenvalue test indicates 3 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):
DLOG(SEN)
-106.7013
12.35526
69.51591
DLOG(OIL)
16.58454
88.88217
11.45247
DLOG(EX)
-290.3165
94.37331
-287.3705
Unrestricted Adjustment Coefficients (alpha):

D(DLOG(SEN))
D(DLOG(OIL))
D(DLOG(EX))
0.007827
-0.003808
0.001309
-0.001086
-0.012067
-0.000759
Page 17
-0.003048
-0.001340
0.001783
1 Cointegrating Equation(s):
Log likelihood
5590.689
Normalized cointegrating coefficients (standard error in parentheses)

DLOG(SEN)
DLOG(OIL)
DLOG(EX)
1.000000
-0.155430
2.720834
(0.05594)
(0.25062)
Adjustment coefficients (standard error in parentheses)
D(DLOG(SEN))
-0.835138
(0.06505)
D(DLOG(OIL))
0.406332
(0.11089)
D(DLOG(EX))
-0.139619
(0.02283)
2 Cointegrating Equation(s):
Log likelihood
5675.236
Normalized cointegrating coefficients (standard error in parentheses)

DLOG(SEN)
DLOG(OIL)
DLOG(EX)
1.000000
0.000000
2.824833
(0.25049)
0.000000
1.000000
0.669108
(0.32764)
Adjustment coefficients (standard error in parentheses)
D(DLOG(SEN))
-0.848561
0.033247
(0.06532)
(0.05498)
D(DLOG(OIL))
0.257236
-1.135738
(0.09882)
(0.08318)
D(DLOG(EX))
-0.149002
-0.045799
(0.02275)
(0.01915)
The H0 of Cointegration is rejected for all 3 possible pairs for existence of cointegration.
The unrestricted VAR can, therefore, be applied now.
Granger Causality Test:

VAR Granger Causality/Block Exogeneity Wald Tests
Date: 06/23/13 Time: 16:12
Sample: 1 639
Dependent variable: DLOG(SEN)
Page 18
Excluded
Chi-sq
df
Prob.
DLOG(OIL)
DLOG(EX)
5.287301
49.19361
3
3
0.1519
0.0000
All
54.27170
0.0000
Dependent variable: DLOG(OIL)

Excluded
Chi-sq
df
Prob.
DLOG(SEN)
DLOG(EX)
1.856538
0.518338
3
3
0.6027
0.9148
All
2.386966
0.8809
Dependent variable: DLOG(EX)

Excluded
Chi-sq
df
Prob.
DLOG(SEN)
DLOG(OIL)
9.790470
4.567472
3
3
0.0204
0.2064
All
13.33178
0.0381
The granger causality test with H0 of non-causality running from the independent
variable DLOG(EX) to the dependent variable DLOG(SEN) has been rejected and
therefore, it is confirmed that Exchange Rate movement Granger causes Sensex
movement.
Similarly, the H0 of non-causality running from the independent variable DLOG(SEN) to

the dependent variable DLOG(EX) has been rejected and therefore, it is confirmed that
Sensex movement Granger causes Exchange rate movement.
In other words, there is a bidirectional causality that exists between the sensex and the
exchange rate movement.
Forecasting can be done now using the above VAR model with lag structure of 3 between
Sensex and Exchange Rate.
Page 19

Regression Arima Garch Var Model

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Regression Arima Garch Var Model

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Forecasting using Regression,

ARIMA and VAR Models

Submitted to Prof. Sajal Ghosh for partial fulfillment of Part Time

E-views Output for multiple linear regression model:

Management Development Institute

Mean dependent var

October, 2011 PT-PGPM

Serial Correlation LM Test:

Management Development Institute

Mean dependent var

October, 2011 PT-PGPM

Check for Multicollinearity:

Correlation between X2 and X3 is found to be 0.620523 which is not high enough to

The final regression model used for forecasting is as follows:

Forecasting using the model:

Root Mean Squared Error

Management Development Institute

October, 2011 PT-PGPM

E-views Output for correlogram:

Management Development Institute

October, 2011 PT-PGPM

Performing the ADF Unit Root test for check of

Augmented Dickey-Fuller test statistic

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Management Development Institute

Mean dependent var

October, 2011 PT-PGPM

Null Hypothesis: D(DEMAND) has a unit root

Augmented Dickey-Fuller test statistic

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Management Development Institute

Mean dependent var

October, 2011 PT-PGPM

Checking the correlogram with first difference series for

Date: 06/23/13 Time: 15:14

Management Development Institute

October, 2011 PT-PGPM

Nothing can be derived from the correlogram regarding AR and MA components so

Date: 06/23/13 Time: 15:15

Management Development Institute

October, 2011 PT-PGPM

31 -0.151 -0.118 100.68 0.000

This correlogram shows an indication of AR(2), SMA(12) process. Confirming the

Confirming AR and MA components from the

Mean dependent var

Date: 06/23/13 Time: 15:20

Management Development Institute

October, 2011 PT-PGPM

Forecasting using the model:

Management Development Institute

October, 2011 PT-PGPM

Root Mean Squared Error

Outcome of dynamic forecasting:

Root Mean Squared Error

Management Development Institute

October, 2011 PT-PGPM

Stationarity test for all the three series:

ADF Unit Root Test for Sensex:

Null Hypothesis: SEN has a unit root

Augmented Dickey-Fuller test statistic

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation