RESEARCH METHODS IN FINANCE

Assignment-01

Submitted To:
Dr Arshad Hassan
Submitted By:
Sohail Rizwan
Reg # PM123012
Sec # 01

CO-INTEGRATION
Sense of co-movement by graph:
10
9
8
7
6
5
4
3

Ln SSE
Ln VTX

2
1
0

Using the above graphical analysis we observe a sense of co-movement between the two selected series
i.e. Shangai Stock Exchange and Six Swiss exchange-VTX.

Unit Root Analysis

A. Shangai Stock Exchange (SSE)
Trend and Intercept at level:
Null Hypothesis: SSE has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=15)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-3.479447
-3.992283
-3.426494
-3.136480

0.0436

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(SSE)
Method: Least Squares
Date: 08/31/13 Time: 02:07
Sample (adjusted): 2 272
Included observations: 271 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

SSE(-1)
C
@TREND(1)

-0.064808
0.435508
0.000314

0.018626
0.117134
0.000170

-3.479447
3.718027
1.850427

0.0006
0.0002
0.0654

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.051382
0.044303
0.131072
4.604226
167.6497
7.258104
0.000852

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.010264
0.134076
-1.215127
-1.175251
-1.199116
2.069614

Interpretation: At first step of Unit Root Analysis, trend and intercept is observed insignificant at level
which suggests using trend further for the detection of data stationarity whether resulting at level or first
difference.

Intercept at level:
Null Hypothesis: SSE has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=15)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-3.315579
-3.454353
-2.872001
-2.572417

0.0151

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(SSE)
Method: Least Squares
Date: 08/31/13 Time: 02:08
Sample (adjusted): 2 272
Included observations: 271 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

SSE(-1)
C

-0.037246
0.279174

0.011234
0.081498

-3.315579
3.425519

0.0010
0.0007

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.039262
0.035690
0.131662
4.663051
165.9295
10.99306
0.001040

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.010264
0.134076
-1.209812
-1.183228
-1.199138
2.100668

Interpretation: At second step of Unit Root Analysis, intercept is found significant at level which
suggests using trend further for the detection of data stationarity. And, Augmented Dickey-Fuller test
statistic is also significant which proves that data is stationary at level in this series (SSE).

B. Six Swiss Exchange-VTX

Trend and Intercept at level:
Null Hypothesis: VTX has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic - based on SIC, maxlag=15)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-1.825425
-3.992411
-3.426557
-3.136516

0.6898

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(VTX)
Method: Least Squares
Date: 08/31/13 Time: 02:10
Sample (adjusted): 3 272
Included observations: 270 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

VTX(-1)
D(VTX(-1))
C
@TREND(1)

-0.015686
0.157771
0.135683
2.16E-05

0.008593
0.059857
0.068118
5.29E-05

-1.825425
2.635798
1.991895
0.408646

0.0691
0.0089
0.0474
0.6831

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.046570
0.035817
0.045077
0.540502
455.7332
4.330857
0.005310

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.005899
0.045907
-3.346172
-3.292862
-3.324765
1.995518

Interpretation: At first step of Unit Root Analysis, trend and intercept is found insignificant at level
which suggests using trend further for the detection of data stationarity whether resulting at level or first
difference.

Intercept at level:
Null Hypothesis: VTX has a unit root
Exogenous: Constant
Lag Length: 1 (Automatic - based on SIC, maxlag=15)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-2.276023
-3.454443
-2.872041
-2.572439

0.1806

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(VTX)
Method: Least Squares
Date: 08/31/13 Time: 02:11
Sample (adjusted): 3 272
Included observations: 270 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

VTX(-1)
D(VTX(-1))
C

-0.013079
0.155470
0.116417

0.005746
0.059499
0.049090

-2.276023
2.613011
2.371529

0.0236
0.0095
0.0184

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.045971
0.038825
0.045007
0.540842
455.6484
6.432860
0.001868

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.005899
0.045907
-3.352951
-3.312969
-3.336896
1.994981

Interpretation: At second step of Unit Root Analysis, intercept is found significant at level which
suggests using trend further for the detection of data stationarity. And, Augmented Dickey-Fuller test
statistic is insignificant which directs using the same assumption of intercept at first difference on the
series.

Intercept at first difference:

Null Hypothesis: D(VTX) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=15)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-13.96447
-3.454443
-2.872041
-2.572439

0.0000

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

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(VTX,2)
Method: Least Squares
Date: 09/02/13 Time: 01:09
Sample (adjusted): 3 272
Included observations: 270 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

D(VTX(-1))
C

-0.835427
0.004866

0.059825
0.002786

-13.96447
1.746595

0.0000
0.0819

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.421174
0.419014
0.045357
0.551335
453.0543
195.0064
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

-0.000382
0.059506
-3.341143
-3.314488
-3.330439
2.000702

Interpretation: Using intercept at first difference in this analysis, Augmented Dickey-Fuller test statistic
found significant which proves that the series (SSE-VTX) is stationary at first difference.
Decision of using ARDL-approach: As both the series i.e. SSE and SSE-VTX are stationary at different
levels, ARDL approach will be used consequently to study the co-movement of the said series.

ARDL approach Results

Estimates of ARDL regression:

Autoregressive Distributed Lag Estimates

ARDL(1,0) selected based on Schwarz Bayesian Criterion
*******************************************************************************
Dependent variable is X1
271 observations used for estimation from 1991M2 to 2013M8
*******************************************************************************
Regressor
Coefficient
Standard Error
T-Ratio[Prob]
X1(-1)
.92918
.017501
53.0934[.000]
X2
.061173
.014868
4.1146[.000]
*******************************************************************************
R-Squared
.96531 R-Bar-Squared
.96518
S.E. of Regression
.13046 F-stat. F( 1, 269) 7486.0[.000]
Mean of Dependent Variable 7.2301 S.D. of Dependent Variable .69917
Residual Sum of Squares
4.5783 Equation Log-likelihood
168.4142
Akaike Info. Criterion 166.4142 Schwarz Bayesian Criterion 162.8121
DW-statistic
2.0675 Durbin's h-statistic -.58019[.562]
*******************************************************************************

Diagnostic Tests
*******************************************************************************
* Test Statistics *
LM Version
*
F Version
*
*******************************************************************************
*
*
*
*
* A:Serial Correlation*CHSQ( 12)= 25.5536[.012]*F( 12, 257)= 2.2297[.011]*
*
*
*
*
* B:Functional Form *CHSQ( 1)= .10628[.744]*F( 1, 268)= .10515[.746]*
*
*
*
*
* C:Normality
*CHSQ( 2)= 3371.6[.000]*
Not applicable
*
*
*
*
*
* D:Heteroscedasticity*CHSQ( 1)= 9.4588[.002]*F( 1, 269)= 9.7285[.002]*
*******************************************************************************
A:Lagrange multiplier test of residual serial correlation
B:Ramsey's RESET test using the square of the fitted values
C:Based on a test of skewness and kurtosis of residuals
D:Based on the regression of squared residuals on squared fitted values

Long-run Coefficient:
Estimated Long Run Coefficients using the ARDL Approach
ARDL(1,0) selected based on Schwarz Bayesian Criterion
*******************************************************************************
Dependent variable is X1
271 observations used for estimation from 1991M2 to 2013M8
*******************************************************************************
Regressor
Coefficient
Standard Error
T-Ratio[Prob]
X2
.86380
.013682
63.1340[.000]
*******************************************************************************

Error Correction Model:

Error Correction Representation for the Selected ARDL Model
ARDL(1,0) selected based on Schwarz Bayesian Criterion
*******************************************************************************
Dependent variable is dX1
271 observations used for estimation from 1991M2 to 2013M8
*******************************************************************************
Regressor
Coefficient
Standard Error
T-Ratio[Prob]
dX2
.061173
.014868
4.1146[.000]
ecm(-1)
-.070819
.017501
-4.0466[.000]
*******************************************************************************
List of additional temporary variables created:
dX1 = X1-X1(-1)
dX2 = X2-X2(-1)
ecm = X1 -.86380*X2
*******************************************************************************
R-Squared
.056719 R-Bar-Squared
.053212
S.E. of Regression
.13046 F-stat. F( 1, 269) 16.1748[.000]
Mean of Dependent Variable .010264 S.D. of Dependent Variable .13408
Residual Sum of Squares
4.5783 Equation Log-likelihood
168.4142
Akaike Info. Criterion 166.4142 Schwarz Bayesian Criterion 162.8121
DW-statistic
2.0675
*******************************************************************************
R-Squared and R-Bar-Squared measures refer to the dependent variable
dX1 and in cases where the error correction model is highly
restricted, these measures could become negative.