HOW TO PERORM A VAR (VECROE AUTOREGRESSIVE MODEL) ESTIMATION All would be performed using Eviews.

Step 1: Follow the introductions, generate two new series: First, log difference is the difference of two consecutive logs not the log of the difference. Hence dlnmexico = lnmexico lnmexico(-1), dlnusa = lnusa = lnusa(-1). These would be the dependent variable in the coming estimation.

Step 2: Open two groups in Eviews (right click on both, choose open groups). Go for the screen: Proc -> Make Vector Autoregressive -> unrestricted VAR (as default) Step 3: Report the result by writing down coefficients and t-statistic or just draw the whole table. Step 4: Decide choice of lags. Normally it will appear Eviews automatically chooses it for us. However, a plausible explanation required. It is based on Information criteria: Anaike (AIC); Hannan- Quinn (HQ) and Schwarz (SBC or SC). Turn out to be chosen:

Lag 0 1 2 3 4 5 6 7 8

LogL 617.2912 627.4703 635.3922 638.0547 642.6126 644.5080 647.2758 648.5037 651.0766

LR NA 19.73494 15.03551* 4.944700 8.278504 3.365328 4.801377 2.079825 4.253248

FPE 1.21e-08 1.06e-08 9.82e-09* 1.01e-08 9.99e-09 1.04e-08 1.07e-08 1.14e-08 1.17e-08

AIC -12.55696 -12.68307 -12.76311* -12.73581 -12.74720 -12.70424 -12.67910 -12.62252 -12.59340

SC -12.50421 -12.52480* -12.49933 -12.36653 -12.27241 -12.12395 -11.99329 -11.83121 -11.69658

HQ -12.53563 -12.61905 -12.65642* -12.58644 -12.55515 -12.46953 -12.40170 -12.30245 -12.23065

* 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 * provides some direction. The information criteria needs to be MINIMUM hence choose lags = 8 (this choice of maximum lags test is pre-determined by Eviews when the sample is large, 3 would be in choice if sample is small, dont attempt to change this number if in a quite convenient question such as in tests. The more proper way to check the choice of lags is to perform a test not only look at information criteria - hence, to be easily implementing, undertake the default. Mind you, if change from 8 to 10, the comparisons would be different as it reduces the number of observations tested, by 2) as a favourite

choice. It is suggested to be NEGATIVE VALUE as well? Then we choose the lags of 2 as it gets most negative values and lowest criteria. It is done in term of lags. The significance is chosen at 5% level as usual as the data collected in relevant to the economic value as well as could be meaningful for customers relevance. 2. WHY THESE ESTIMATES (VARIABLES).

The VAR is meant to capture the linear interdependencies among the time series, which from first two questions suggest. HOW TO PERFORM AN AUGMENTED DICKEY FULLER TEST BY EVIEWS?

First, it is important to have an estimation of the time series of being tested. The suggestion could be found by plotting the series against time (t). There are three cases considered. Each provides us what to next?

IT IS TO TEST THE STATIONARY OF THE SERIES

A) Perform the test with no intercept and trend: When the plot graph suggests a stochastic trends (random-walk type and obviously nonstationary), It is when the trend is wandering or fluctuating around a sample average of 0 (zero). This suggests the difference stationary character as the stationary could be achieved by difference. The null hypothesis, which could be adapted for all three cases, is: : it means the series is non-stationary : It means the series is stationary. Fail to reject the nul hypothesis will be to accept that the stationary occurs.

B) Perform the test with intercept: Just when the trend fluctuates around a non-zero constant, everything remains. C) Perform the test with both intercept and trend (@trend needs adding if perform manually) The equation would be where t is the trend (@trend)

Note: the critical value has to be different. The best way is to rely on Eviews doing those steps. Choose each series -> View -> Unit Root test -> choose In level and Trend and intercept (this varies upon three cases above). The critical values of t-statistic appear to be reported. Take the 5% and 10% to report. The calculated value appears nearby or just use the Prob*. Normally, we fail to reject H0 or series are non-stationary.