VAR Models

For a set of n time series variables

)' ..., , (
, 2 1 nt t t t
y y y y
, a VAR model of order p
(VAR(p)) can be written as:
(1) t p t p t t t
u y A y A y A y + + + +

...
2 2 1 1
where the
i
A
s are (n!n) coefficient matrices and
)' ,..., , (
2 1 nt t t t
u u u u
is an "nobservable
i.i.d. #ero mean error term.
VAR Analysis
(Enders Chapter 5)
$onsider a two%variable VAR(1) with &'2.
(1) yt t t t t
z c y c z b b y + + +
1 12 1 11 12 1(
(2) zt t t t t
z c y c y b b z + + +
1 22 1 21 21 2(
with ) , ( ( . . )
2
i it
d i i

and
( ) , cov(
z y


*n matri! form:
(+)
1
]
1

+
1
]
1

1
]
1

+
1
]
1

1
]
1

1
]
1

zt
yt
t
t
t
t
z
y
c c
c c
b
b
z
y
b
b

1
1
22 21
12 11
2(
1(
21
12
1
1

,ore simpl-:
(.)
t t t
X BX + +
1 1 (
Structural VAR (SVAR) or the Primitive
System
/o normali#e the 012 vector, we need to m"ltipl- the e3"ation b- inverse 4:
t t t
B X B B BX B
1
1 1
1
(
1 1

+ + , th"s:
(5)
t t t
e X A A X + +
1 1 (
VAR in standard form (unstructured VAR=UVAR).
or:
(6)
1
]
1

+
1
]
1

1
]
1

+
1
]
1

1
]
1

t
t
t
t
t
t
e
e
z
y
a a
a a
a
a
z
y
2
1
1
1
22 21
12 11
2(
1(
/hese error terms are composites of the str"ct"ral innovations from the primitive s-stem.
7hat are their characteristics8moments9
t t
B e
1
where
1
B
a
B
B
1

T
B
B
:) (
1

1
]
1

1
1
) 1 (
1
21
12
12 21
b
b
b b

VAR 1
: B
'cofactor of 4 and
T
B:) ( 'transpose.
/h"s
(;)
1
]
1

1
]
1

1
]
1

zt
yt
t
t
b
b
b b e
e

1
1
) 1 (
1
21
12
12 21 2
1
<r

zt yt
t
b
e

12
1
where 12 21
1 b b

zt yt
t
b
e

21
2
s ' are white noise, th"s es are ) , ( (
2
i
:
( ) (
it
e E
2
2 2
12
2
2
2 2
12
2
2
1 1
) (
) ( ) (

+

z y zt yt
t t
b b E
e E e Var

is time independent, and the same is tr"e for
) (
2t
e Var
.
4"t covariances are not #ero:
$ovar (
) ( )= )( >(
) ( ) , (
2
2
21
2
12
2
21 12
2 1 2 1

y z yt zt zt yt
t t t t
b b b b E
e e E e e

.
2o the shoc&s in a standard VAR are correlated. /he onl- wa- to remove the correlation and
ma&e the covar'( is if we ass"me that the contemporaneo"s effects are #ero:
(
21 12
b b
.
/he var8covar matri! of the VAR shoc&s:
1
]
1

2
2 21
12
2
1


.
Identification
7e can estimate (6) with <02, since the R12 consists of predetermined variables and the
error terms are white noise. /he errors are seriall- "ncorrelated b"t correlated across
e3"ations. Altho"?h 2@R co"ld be "sed in these cases, here we do not need it since all the
R12 variables are identical, so there is no efficienc- ?ain in "sin? 2@R over <02. 4"t we
cannot "se <02 to estimate the 2VAR beca"se of contemporaneo"s effects, which are
correlated with the s ' (str"ct"ral innovations).
<"r ?oal:
/o see how a str"ct"ral innovation it

affects the dependent variables in o"r ori?inal model.

7e estimate the red"ced form (standard VAR), so how can we recover the parameters for the
primitive s-stem from the estimated s-stem9
VAR 2
VAR: A parameters ( ' 6 coefficient estimatesB 2 variance estimates B 1 $ovar
estimate).
2VAR: 1( parameters ('C parameters B 2 variances). *t is "nderidentified.
2ims (1AC() s"??ested "sin? a rec"rsive s-stem. For this we need to restrict some of the
parameters in the VAR. D!: ass"me - is contemporaneo"sl- affected b- # b"t not vice%versa.
/h"s we ass"me that
(
21
b
. *n other words, - is affected b- both str"ct"ral innovations of
- and #, while # is affected onl- b- its own str"ct"ral innovation. /his is a trian?"lar
decomposition also called $holes&- decomposition. /hen we have A parameter estimates
and A "n&nown str"ct"ral parameters, and 2VAR is e!actl- identified.
Eow the 2VAR s-stem becomes:
(C)
1
]
1

+
1
]
1

1
]
1

+
1
]
1

1
]
1

1
]
1

zt
yt
t
t
t
t
z
y
c c
c c
b
b
z
y b

1
1
22 21
12 11
2(
1( 12
1 (
1
1
]
1

1
1
) 1 (
1
21
12
12 21
1
b
b
b b
B

1
]
1

1 (
1
12
b
.
1ence the VAR s-stem in standard form can be written:
(C)
1
]
1

+
1
]
1

1
]
1

+
1
]
1

1
]
1

zt
zt yt
t
t
t
t
b
z
y
c c
c b c c b c
b
b b b
z
y

12
1
1
22 21
22 12 12 21 12 11
2(
2( 12 1(
) ( ) (
*f we match the coefficients in (C) with the estimates in (6)
1
]
1

+
1
]
1

1
]
1

+
1
]
1

1
]
1

t
t
t
t
t
t
e
e
z
y
a a
a a
a
a
z
y
2
1
1
1
22 21
12 11
2(
1(
, we can e!tract the coefficients of the 2VAR:
2( 12 1( 1(
b b b a
2( 2(
b a
z y
e b e
12 1

21 12 11 11
c b c a
21 21
c a
z
e e
2
22 12 12 12
c b c a
22 22
c a
12
Cov '
2
2
21
2
12
) (

+
y z
b b
'
2
12 z
b
Impulse response functions
7e want to trace o"t the time path of the effect of str"ct"ral shoc&s on the dependent
variables of the model. For this, we first need to transform the VAR into a V,A
representation.
Rewrite the @VAR more compactl-:
L A I
e
L A I
A
X e X A A X
t
t t t t
1 1
(
1 1 (
) 5 (

+ +

VAR +
First, consider the first component on the R12:
12 21 22 11
2(
1(
22 12
21 22
22 21
12 11
(
22 21
12 11
1
( 1
(
1
1
1
(
) 1 )( 1 (
1
1
1
1
1
1
) (
) (
a a a a
a
a
a a
a a
a a
a a
A
a a
a a
A I
A A I
A A I
A I
A
a

1
]
1

1
]
1

1
]
1

1
]
1

1
]
1

+
+

z
y
a a a a
a a a a
2( 22 1( 12
2( 21 1( 22
) 1 (
) 1 (
1
2tabilit- re3"ires that the roots of
L A I
1

lie o"tside the "nit circle. 7e will ass"me that it

is the case. /hen, we can write the second component as:
1
]
1

1
]
1

i t
i t
i
i i i t
i t
e
e
a a
a a
e A
L A I
e
, 2
, 1
(
22 21
12 11
( 1
1
7e can th"s write the VAR as a V,A with the standard VARs error terms.
(A)
1
]
1

1
]
1

+
1
]
1

1
]
1

i t
i t
i
i
A
t
t
e
e
a a
a a
z
y
z
y
i
, 2
, 1
(
22 21
12 11

4"t these are composite errors consistin? of the str"ct"ral innovations. 7e m"st th"s replace
the es with the s ' from (;)
t t
b
b
e
1
]
1

1
1
1
21
12
(Aa)
1
]
1

1
]
1

+
1
]
1

1
]
1

i t z
i t y
i
i
t
t
i
b
b
b b
A
z
y
z
y
,
,
(
21
12
21 12
1
1
1

1
]
1

1
]
1

+
1
]
1

i t z
i t y
i
i i
i i
i
z
y
,
,
) (
22
) (
21
) (
12
) (
11
(

i t
i i
X

+
(
.
Impact multipliers
/he- trace the impact effect of a one "nit chan?e in a str"ct"ral innovation. D!: find the
impact effect of t z,

on t
y
and t
z
:
) ( (
12
,

t z
t
d
dy

) ( (
22
,

t z
t
d
dz

0ets trace the effect one period ahead on 1 + t

y
and 1 + t
z
) 1 (
12
,
1

+
t z
t
d
dy

) 1 (
22
,
1

+
t z
t
d
dz

VAR .
Eote that this is the same effect on t
y
and t
z
of a str"ct"ral innovation one period a?o:
) 1 (
12
1 ,

t z
t
d
dy

) 1 (
22
1 ,

t z
t
d
dz

Impulse response functions are the plots of the effect of t z,

on c"rrent and all f"t"re - and

#. *Rs show how
F G
t
y
or
F G
t
z
react to different shoc&s.
D!:
*mp"lse response f"nction of - to a one "nit chan?e in the shoc& to #
'
) ( (
12

,
) 1 (
12

,
) 2 (
12

,
Cumulated effect is the s"m over *R f"nctions:

n
i
i
( 12
) ( .
Lon!run cumulated effect:
n
lim

n
i
i
( 12
) (
*n practice we cannot calc"late these effects since the 2VAR is "nderidentified. 2o we m"st
impose additional restrictions on the VAR to identif- the imp"lse responses.
*f we "se the $holes&- decomposition and ass"me that - does not have a contemporaneo"s
effect on #, then
(
12
b
. /h"s the error str"ct"re becomes lower trian?"lar:
(1()
1
]
1

1
]
1

1
]
1

zt
yt
t
t
b
e
e

1 (
1
12
2
1
/he y

shoc& doesnt affect # directl- b"t it affects it indirectl- thro"?h its la??ed effect in
VAR.
"raner Causality: *f the # shoc& affects e1, e2 and the - shoc& doesnt affect e2 b"t it
affects e1, then # is ca"sall- prior to -.
!"ample#
$alc"late the imp"lse response f"nctions on
F G
t
y
,
F G
t
z
of a "nit chan?e in # shoc&
) (
zt

from an estimate of a two%variable VAR(1):

t t t t
e z y y
1 1 1
2 . ( ; . ( + +

t t t t
e z y z
2 1 1
; . ( 2 . ( + +

2
2
2
1
and
C . (
12

.
For this, we m"st ?et the estimates of the primitive f"nction (2VAR) from the estimated
coefficients:
Ass"me $holes&- decomposition
(
21
b
.
C . ( C . (
12 2
2
12
2 1
2 , 1
12

b
b
#E #E
Cov

Altho"?h this information is s"fficient to calc"late the imp"lse responses in this simple
model, we can e!tract all of the coefficients of the primitive s-stem as follows:
VAR 5
(
2( 1(
a a (
2(
b
( (
1( 2( 12 1(
b b b b
; . (
22 22
c a and 2 . (
21 21
c a
From
21 12 11 11
; . ( c b c a we ?et 5. . (
11
c .
From
21 12 11 11
; . ( c b c a
and +6 . ( ) ; . ( ( C . ( ; . (
12 12 22 12 12 12
+ c c c b c a and 5. . (
11
c
2"bstit"te 12
b
into (1() to ?et:
zt yt t
e C . (
1
+
zt t
e
2
A 1 "nit zt

shoc& is instantaneo"sl- absorbed 1((H b- # and C(H b- -.

*mpact m"ltipliers:
(11) zt yt t t t
z y y C . ( 2 . ( ; . (
1 1
+ + +

zt t t t
z y z + +
1 1
; . ( 2 . (
At t'(:
C . (
,

t z
t
d
dy

1
,

t z
t
d
dz

At t'1: forward (11) b- one period:

;6 . ( 2 . ( ; . (
, , ,
1
+
+
t z
t
t
z
t
t z
t
d
dz
d
dy
d
dy

C6 . ( ; . ( 2 . (
, , ,
1
+
+
t z
t
t
z
t
t z
t
d
dz
d
dy
d
dz

At t'2: forward (11) b- two periods:
;( . ( 2 . ( ; . (
,
1
,
1
,
2
+
+ + +
t z
t
t
z
t
t z
t
d
dz
d
dy
d
dy

;5 . ( ; . ( 2 . (
,
1
,
1
,
2
+
+ + +
t z
t
t
z
t
t z
t
d
dz
d
dy
d
dz

0on?%r"n m"ltipliers: both variables ?o bac& to #ero.
$"m"lative m"ltipliers:
.. ;( . ( ;6 . ( C . (
(
,
+ + +

+
n
i
t z
i t
d
dy

... ;5 . ( C6 . ( 1
(
,
+ + +

+
n
i
t z
i t
d
dz

Res"lts are orderin?%dependent. *f -o" choose the decomposition s"ch that

(
12
b

instead of 12
b
, -o" can have 3"ite different res"lts. <ne rob"stness chec& is,
therefore to chan?e the orderin?. *f res"lts dont chan?e then the estimates are rob"st
to orderin?.
*f the correlation between the errors is low ( 12

small), then chan?in? orderin? does

not ma&e a bi? difference.
VAR 6
Dviews specification
%Resid"al: i?nores the correlations in the VAR resid"alsI ?ives the ,A
coefficients of the infinite ,A representation of the VAR.
%$holes&- (with and witho"t de?ree of freedom adJ"stment for small sample
correction).
%Kenerali#ed imp"lses: Lesaran and 2hin (1AAC) methodolo?-. *ndependent
of the VAR orderin?. Applies a $holes&- factori#ation to each variable with
the J%th variable at the top of the orderin?.
VAR ;
$onfidence Intervals
1elp to see the de?ree of precision in the coefficient estimates. <btained b- ,onte $arlo
st"d-. Dviews provides two t-pes of calc"lations of standard errors for the confidence
intervals: ,onte $arlo and Anal-tic. For ,%$ -o" need to provide the n"mber of draws.
Dviews then ?ives the #E 2 t standard bands aro"nd the imp"lse responses.
Eote that for VD$,, these confidence intervals are not available on Dviews. For those
interested in pro?rammin? themselves, instr"ctions to ?enerate confidence bo"nds for
2VAR2 are available at: http:88www.eviews.com8s"pport8e!amples8docs8svar.htmMblan3"ah+
Variance %ecomposition
*t tells how m"ch of a chan?e in a variable is d"e to its own shoc& and how m"ch d"e to
shoc&s to other variables. *n the 2R most of the variation is d"e to own shoc&. 4"t as the
la??ed variables effect starts &ic&in? in, the percenta?e of the effect of other shoc&s
increases over time.
/o see this consider the V,A representation of VAR in (Aa):
1
]
1

1
]
1

+
1
]
1

1
]
1

i t z
i t y
i
i
i
t
t
t
i
b
b
b b
A
z
y
z
y
$
,
,
(
21
12
21 12
1
1
1

1
]
1

1
]
1

+
1
]
1

i t z
i t y
i
i i
i i
i
z
y
,
,
) (
22
) (
21
) (
12
) (
11
(

or
i t
i i t
X $

+
(
.
7e want to calc"late the n%period forecast error of ! in order to find that of sa-, -.
2tart from 1 period:
...
1 2 1 1 ( 1
+ + + +
+ + t t t t
X $
...
1 2 1 1
+ + +
+ t t t t
X $ E
1%period forecast error 1 ( 1 1 + + +

t t t
E$ $
Lroceed in the same wa- and ?et 2%period forecast error:
1 1 2 ( 2 2 + + + +
+
t t t t
E$ $
+%period forecast error:
1 2 2 1 + ( + + + + + + +
+ +
t t t t t
E$ $
n%period forecast error:

+ + + + + + +
+ + + +
1
( 1 1 2 2 1 1 (
...
n
i i n t t n n t n t n t n t n t
E$ $
Eow consider -, the first element of the ! matri!. *ts n%step%ahead forecast error is:
VAR C
) ... (
1 , 1 , 11 1 , 1 , 11 , ( , 11 + + + + +
+ + +
t y n n t y n t y n t n t
Ey y
) ... (
1 , 1 , 21 1 , 1 , 21 , ( , 21 + + +
+ + + +
t z n n t z n t z

/he variance of its n%step%ahead forecast error is:
+ + + +

time over %ecreases
shoc& o'n to due
iance of proportion
n
y n y
var
1 , 11
2
1 , 11
2
( , 11
2 2 2
,
) ... (

time over "ro's
shoc& z a to due
iance of proportion
n
z
var
1 , 21
2
1 , 21
2
( , 21
2 2
) ... ( + + +
*f z

can e!plain none of the forecast error var of the se3"ence

F G
t
y
at all forecast
hori#ons (
(
2 2
,

z n y

), then
F G
t
y
is e"o&enous.
*f z

can e!plain most of the forecast error var of the se3"ence

F G
t
y
at all forecast
hori#ons (
A . (
2 2
,

z n y

for e!.), then
F G
t
y
is endo&enous.
Eote that e!o?eneit- is not the same as Kran?er%ca"salit-. *t is a concept involvin? the
contemporaneo"s val"e of an endo?eno"s variable and the contemporaneo"s error term of
another variable.
2ame identification problem as for the imp"lse response f"nctions. 4"t if the cross%
correlation is not si?nificant then orderin? will not matter.
*mp"lse responses B Variance decomposition ' innovation acco"ntin?.
'ypothesis (estin&
1. 2pecification of the VAR model
Necide on the variables that enter the VAR: need a model for this. *f the VAR is
misspecified beca"se of missin? variables, it will create an omitted variable(s)
problem and be reflected in seriall- correlated error terms.
E"mber of la?s. 7e need to incl"de the optimal n"mber of la?s. Eote that
increasin? the n"mber of la?s does not solve the resid"al correlation if there are
omitted variables.
Dven if there is no omitted variables and we incl"de the optimal n"mber (or
reasonable M) of la?s, resid"als can still reflect a problem ca"sed b- str"ct"ral brea&s.
At this sta?e we will control for them b- determinin? the brea& dates e!o?eno"sl-.
VAR A
Netermination of optimal la? len?th
a. 0R tests
(1()
) ( ) ) ln )(ln (
2
( m T L)
u r

/'Mobservations (after acco"ntin? for la?s)
m'Mparameters estimated in each e3"ation of the "nrestricted s-stem, incl"din? the
constant.
r
ln
nat"ral lo? of the determinant of the covariance matri! of resid"als of the
restricted s-stem.
3 ' total n"mber of restrictions in the s-stem ('Mla?s times
2
n ) and n'Mvariables (or
e3"ations).
*f the 0R statistics O critical val"e, reJect the n"ll of the restricted s-stem.
Dviews follows 0"t&epohl (1AA1) methodolo?- in cond"ctin? a se3"ential 0R test
(adJ"stin? for m). Po" start with the ma!im"m Mla?s followin? -o"r prior. 2"ppose -o"
decide & la?s. /hen -o" compare the &th (lar?est) la?s covar matri! determinant with
that of &%1. *f the 0R statistics O critical val"e, reJect the n"ll of &%1 la?s over & la?s.
/he 0R test statistics then becomes:
(11)
) ( ) ) ln )(ln (
2
1
( m T L)
t t


and 3 '
2
n
1owever, if -o" want to compare sa-, 12
th
la? with C
th
la?, -o" have to do calc"late the
test statistics -o"rself, "sin? the form"la in (1().
b. *nformation criteria
* T AIC 2 ln +
T * T #BC ln ln +
$hoose the M la? that minimi#es the criteria.
Eote that these criteria are not tests, the- mainl- indicate ?oodness of fit of alternatives.
2o the- sho"ld be "sed as complements to the 0R tests.
Po" can "se the information criteria to compare nonse3"ential tests.
+. Nia?nostic tests of the resid"als (in Dviews)
Lortmantea" A"tocorrelation /est (4o!%Lierce%0J"n?%4o! Q statistics) for resid"al
correlation.
E"ll 1-pothesis:
Eo serial correlation "p to chosen la?.
Q statistics distrib"ted
2

dof ' ) (
2
p h n n'Mvariables, h'Mma! chosen
la?s, p'order of the VAR.
Eot a ?ood statistics to "se if there is a 3"asi%"nit root (re3"ires hi?h order ,A
coefficients to be ().
A"tocorrelation 0, /est.
VAR 1(
E"ll h-pothesis:
no a"tocorrelation "p to la? h.
0, statistics distrib"ted
2

dof '
2
n .
Eormalit- tests
,"ltivariate version of the Rar3"e 4era tests. *t compares the +
rd
and .
th
moments
(s&ewness and &"rtosis) to those from a normal distrib"tion. ,"st specif- a
factori#ation of the resid"als. $hoices in Dviews:
$holes&-: the statistics will depend on the orderin? of the variables.
Noorni& and 1ansen (A.) S*nverse 2QR/ of resid"al correlation matri!:
invariant to the orderin? of variables and the scale of the variables in the
s-stem.
@r#"a (A;)% *nverse 2QR/ of resid"al covariance matri!: same advanta?e as
Noornic& and 1ansen, b"t better.
Factori#ation from 2VAR (later: need to have estimated an 2VAR)
.. Kran?er $a"salit-
*n a two%variable VAR(p)/he process
F G
t
z
does not K%ca"se
F G
t
y
if all coefficients in
( ) (
12
L A
(or a Joint test of
( ) ( ... ) 2 ( ) 1 (
21 21 21
p a a a
at all la?s is not reJected).
/his concept involves the effect of past val"es of # on the c"rrent val"e of -. 2o it answers
the 3"estion whether past and c"rrent val"es of # help predict the f"t"re val"e of -.
*t is different from e!o?eneit- tests, which loo& at whether the c"rrent val"es of #
e!plains c"rrent and f"t"re val"es of -.
*n a n%variable VAR(p), )loc*+e"o&eneity ('bloc&%K%ca"salit-) test loo&s at whether the
la?s of an- variables K%ca"se an- other variable in the s-stem. Po" can test this "sin? the
0R test in (1().
Application
$reate a bivariate VAR(1) and appl- the tests to ?et the best specification of the model.
7or&file:DENDR2Q@AR/DR0P.wf
%Kenerate the rate of ?rowth of mone- s"ppl-
m'lo?(,1E2At)%lo?(,1E2At%1)
%Kenerate the rate of LL* inflation:
*nf'lo?(LL*t)%lo?(LL*t%1)
%Kenerate seasonal d"mmies for each 3"arter of the -ear:
Ni'Tseas(i), where i'1,2,+
or: enders3"artd"mmies.pr?
smpl @all
inf=log(ppi)-log(ppi(-1))
VAR 11
m=log(m1nsa)-log(m1nsa(-1))
for !j=1 to 4
series d{!j}=@seas({!j})
next
%$hec& whether m and inf are *(()
Eow we can create o"r bivariate VAR(1):
Dndo?eno"s variables: m, inf
D!o?eno"s variables: constant, . seasonal d"mmies
Dstimate an "nrestricted VAR
1. /est the la? len?th
/he se3"ential 0R statistics indicates 5 la?s. Also confirmed b- info criteria.
View%0a? 2tr"ct"re%0a? len?th criteria%la?s to incl"de >C=%<U
VAR Lag rder !ele"tion #riteria
$ndogeno%s &aria'les( )*+ ,
$xogeno%s &aria'les( # -1 -. -/
!ample( 101231 .22.34
)n"l%ded o'ser&ations( 112
Lag LogL LR +4$ A)# !# 53
2 0.672202 *A /78.e-29 -11749611 -117///98 -1174.819
1 00/71648 1.97//20 1711e-29 -1.7.620/ -1.7242.0: -1.7166.9
. 12227/91 1.76410. 1788e-29 -1.7/2461 -117006.4 -1.716090
/ 121270.2 10761194 174/e-29 -1.7/9182 -1.722.11 -1.7./241
4 12197129 1/7.062. 17/9e-29 -1.74.1/8 -11701826 -1.7./024:
8 12./7612 127..//4: 17/8e-29: -1.7441/6: -117029.. -1.7..698
1 12.87029 /7081.19 17/9e-29 -1.74./98 -11792991 -1.716412
6 12.97611 8726.614 1742e-29 -1.742086 -11761611 -1.71.911
9 12//7419 9714./.1 17/0e-29 -1.74166/ -11714904 -1.712888
: indi"ates lag order sele"ted '; t<e "riterion
LR( se=%ential modified LR test statisti" (ea"< test at 8> le&el)
+4$( +inal predi"tion error
A)#( A?ai?e information "riterion
!#( !"<@arA information "riterion
53( 5annan-3%inn information "riterion
Po" ma- have priors and want to test for la? len?th -o"rself "sin? a 0R test. 2"ppose we
start with 12 la?s and compare it with C la?s.
$alc"late the determinant of the resid"al covariance matri!:
VAR 12
Dviews ?ives it at the bottom of the estimation

,
_

t t t
p T
' V V
1
det
V

with p'M parameters per e3"ation in the VAR. /he "nadJ"sted
i?nores p.
$stimate @it< 1. lags t<e %nrestri"ted VAR
Ve"tor A%toregression $stimates
-ate( 24B1.B26 Cime( 1.(1.
!ample (adj%sted)( 101/3. .22.31
)n"l%ded o'ser&ations( 181 after adj%stments
!tandard errors in ( ) D t-statis E
-eterminant resid
"o&arian"e (dof adj7) 1712$-29
-eterminant resid
"o&arian"e 6741$-20
Log li?eli<ood 12167820
A?ai?e information
"riterion -1.7/.624
!"<@arA "riterion -117./...
Dstimate with C la?s over the same VAR over the same sample:
-eterminant resid
"o&arian"e (dof adj7) 1712$-29
-eterminant resid
"o&arian"e 9741$-20
Log li?eli<ood 12//7419
A?ai?e information
"riterion -1.74166/
!"<@arA "riterion -11714904
Co do t<e "omparison properl;F @e m%st %se t<e same sample of 1. lags (101/=. .22.=1)
-eterminant resid
"o&arian"e (dof adj7) 1714$-29
-eterminant resid
"o&arian"e 9718$-20
Log li?eli<ood 122874..
A?ai?e information
"riterion -1.7/66.1
!"<@arA "riterion -117808.2
+orm t<e LR test statisti"s( ) ( ) ) ln )(ln (
2
( m T L)
u r
(m+,parameteres in each
e(uation of the unrestricted system-constants.
2
. M n ns restrictio (
, n+,variables)
VAR 1+
0R'>156%(.B(2!12))=>ln(9718$-20)-ln(6741$-20)E =10792 G "<is=r((1.-9)x4)="<is=r(11)= /4
-o not reje"t t<e n%ll7
2. /est the si?nificance of the d"mmies "sin? the same 0R test.
+. Nia?nostic tests of the resid"als
View%Resid"al tests%
Portmanteau test#
VAR Resid%al 4ortmantea% Cests for A%to"orrelations
52( no resid%al a%to"orrelations %p to lag <
!ample( 101/3. .22.34
)n"l%ded o'ser&ations( 181
Lags 3-!tat 4ro'7 Adj 3-!tat 4ro'7 df
1 272///11 *A: 272//866 *A: *A:
. 27/11.66 *A: 27/.2116 *A: *A:
/ 17191./9 *A: 17.26198 *A: *A:
4 17680211 *A: 17608299 *A: *A:
8 /7.18180 *A: /7.00/01 *A: *A:
1 /76/1089 *A: /794.216 *A: *A:
6 47/66006 *A: 4781/... *A: *A:
9 87.008/4 *A: 8749486. *A: *A:
0 87968262 27.296 17208/48 2710.1 4 (14791)
12 07984/00 27.684 127/46./ 27.418 9 (.170)
11 167./001 271429 197.0/29 271261 1.
1. 19791282 27.691 10700482 27..28 11
:C<e test is &alid onl; for lags larger t<an t<e VAR lag order7
df is degrees of freedom for (approximate) "<i-s=%are distri'%tion
*ot reje"t t<e n%ll7
LM test
VAR Resid%al !erial #orrelation L,
Cests
52( no serial "orrelation at lag order <
!ample( 101/3. .22.34
)n"l%ded o'ser&ations( 181
Lags L,-!tat 4ro'
1 .7/.62.9 271680
. 47911900 27/219
/ 187/212. 272241
VAR 1.
4 87480/91 27.4//
8 07.61611 272846
1 .74..11. 271898
6 /7164/0/ 278.01
9 .72018.. 276190
0 276.60.1 270469
12 4718011/ 27/.41
11 976611.. 272161
1. 17028.91 2768/.
4ro's from "<i-s=%are @it< 4 df7
#<is=r(4)=14791
,ostl- not reJect the n"ll.
,ormality (est
VAR Resid%al *ormalit; Cests
rt<ogonaliAation( Resid%al #orrelation (-oorni?-5ansen)
52( resid%als are m%lti&ariate normal
!ample( 101/3. .22.34
)n"l%ded o'ser&ations( 181
#omponent !?e@ness #<i-s= df 4ro'7
1 -2726122/ 2714./61 1 276280
. 272966/4 27.161/. 1 27141.
Hoint 27/80820 . 279/88
#omponent I%rtosis #<i-s= df 4ro'7
1 /7121299 /79/.192 1 27282/
. 171081/8 .17421/2 1 272222
Hoint .87.//09 . 272222
#omponent Har=%e-Jera df 4ro'7
1 /7068286 . 271/62
. .171194/ . 272222
Hoint .8780/40 4 272222
C<e n%ll is a joint test of 'ot< t<e s?e@ness and t<e ?%rtosis7
VAR 15
*ormalit; not reje"ted for inf '%t reje"ted for m d%e to ?%rtosis pro'lem7
*s this somethin? we sho"ld worr- abo"t9 in principle reJection of normal distrib"tion invalidates the
test statistics. 4"t meas"res of s&ewness are fo"nd to be not informative in small samples (4ai, E?
4oston $olle?e 7L 115, 2((1).
.. -ran&er causality
View%la? str"ct"re%K%ca"salit-8bloc& e!o?eneit- test
VAR Kranger #a%salit;BJlo"? $xogeneit; Lald Cests
!ample( 101/3. .22.34
)n"l%ded o'ser&ations( 181
-ependent &aria'le( )*+
$x"l%ded #<i-s= df 4ro'7
, 67126888 8 27.1.9
All 67126888 8 27.1.9
-ependent &aria'le( ,
$x"l%ded #<i-s= df 4ro'7
)*+ 167084.2 8 2722/2
All 167084.2 8 2722/2
#<is=r(8)=11768
*t tests bilaterall- whether the la?s of the e!cl"ded variable affect the endo?eno"s variable.
/he n"ll: the la??ed coefficients are si?nificantl- different than (.
All: Joint test that the la?s of all other variables affect the endo?eno"s variable.
D!: on top panel, first row shows if la??ed variables of , are si?nificantl- different than (,
the second row shows if la??ed variables of all variables other than *EF are #ero (in o"r case
both tests are identical since we onl- have two variables).
For both the n"ll is reJected, tho"?h there is some evidence abo"t effect of inf on m at 1( H
si?nificance level.
VAR 16