21.

16) PDI correlogram

In a correlogram, for a purely white noise process the autocorrelations at various lags hover
round zero. Thus, if the correlogram of an actual (economic) time series resembles the
correlogram of a white noise time series, we can say that time series is probably stationary,
(Gujaratti, 2004)

For the PDI the autocorrelation coefficient starts at a very high value at lag 1 (0.9670) and
declines very slowly. Thus it seems that the PDI time series is non-stationary.











PCE correlogram

For the PCE the autocorrelation coefficient starts at a very high value at lag 1 (0.9696) and
declines very slowly. Thus it seems that the PCE time series is nonstationary.

PROFITS correlogram

For the Profits the autocorrelation coefficient starts at a very high value at lag 1 (0.9539) and
declines very slowly. Thus it seems that the Profits time series is non-stationary.
DIVIDENDS correlogram

For the Dividends the autocorrelation coefficient starts at a very high value at lag 1 (0.9718) and
declines very slowly. Thus it seems that the Dividends time series is non-stationary.
21.18) The ADF test includes time lags therefore it is appropriate for when the error term is
serially correlated than the DF test. This test is conducted by augmenting the equations by
adding the lagged values of the dependent variable.

The null hypothesis is that = 0; that is, there is a unit rootthe time series is non-stationary.
The alternative hypothesis is that is less than zero; that is, the time series is stationary.
Reject null hypothesis when t value is greater than 5% critical value
If the null hypothesis is rejected, it means that Yt is a stationary time series with zero mean,
(Gujaratti, 2004)

For PCE
Test statistic = -1.646
5% Critical value = -3.488, Do not reject null hypothesis, the time series are non-stationary


For Profits
Test statistic = -2.725
5% Critical value = -3.488, Do not reject null hypothesis, the time series are non-stationary

For Dividends
Test statistic = -3.175
5% critical value = -3.488, Do not reject null hypothesis, the time series are non-stationary

For PDI
Test statistic = -2.405
5% critical value = -3.488, Do not reject null hypothesis, the time series are non-stationary

21.19 a) When you regress two time series that are non stationary, you will get a spurious
regression, therefore it is to be expected

b) There is no cointegration between dividends and profits.
We can test using the Cointegrating Regression Durbin Watson test (CRDW) whereby the 1, 5,
and 10 percent critical values to test the hypothesis are 0.511, 0.386, and 0.322, respectively.
Thus, if the computed d value is smaller than, say, 0.511, we reject the null hypothesis of
cointegration at the 1 percent level, (Gujaratti, 2004)
In our case computed d = 0.071, it is less than the critical d values at 1%, 5% and also 10%
therefore we reject the null hypothesis of cointegration, therefore there is no cointegration

We can also use the Johansen test; Johansens testing procedure starts with the test for zero
cointegrating equations (a maximum rank of zero) where the null hypothesis for the first is there
is no cointegration for zero equations which you reject because trace statistic (47.1196) is more
than critical value(15.41). But if there is no cointegration for zero equations then we have to look
at the next if there is cointegration for at least one linear equation, that will be our null
hypothesis, in our time series, the trace value (0.0296) is less than the critical (3.76) which means
we need to accept the null hypothesis that at least one linear equation are cointegrated in our
model. However the weakness of this test is that it relies on asymptotic properties and is
therefore sensitive to specification errors in small samples. Our time series only has 25
realizations which is limited. In the end some judgment in combination with some economic and
statistical model building is unavoidable.

c) Using the ECM the dividends in relation to profit exhibit no long run relationship because the
p = 0.265, it is greater than 0.05 which means it is insignificant, which shows there is no long run
relationship. The series are also not cointegrated therefore they will have no long run
relationship.

d) Dividends has a stochastic trend, this can be seen by using the graphical analysis test


Profits also has a stochastic trend, this can be seen by using the graphical analysis test

e) When the time series are cointegrated it does not matter which is the regressor and which is
the regressand but when you refer to the theory it is obvious that dividends depend on profit.
0
5
0
1
0
0
1
5
0
D
I
V
I
D
E
N
D
S
1960q1 1965q1 1970q1 1975q1 1980q1
Quarter
5
0
1
0
0
1
5
0
2
0
0
2
5
0
P
R
O
F
I
T
S
1960q1 1965q1 1970q1 1975q1 1980q1
Quarter