Tutorials

1. Consider the following EGARCH model [t-statistics are given in ()].Interpret the results
r t =0.023
0.058
t 1+ t
(1.50)

(2.73)

0.5
0.5
ln (ht )=0.069
0.092
t 1 /ht10.072
| t 1 /h t1|+0.982
t

( 28.30 )

( 48.41 )

( 303.11 )

( 7.32)

Solution:
See Enders 3rd edition pp 163

2. Consider

e t=

e1 t
e2 t

( )

()

Xt=

X t = A1 X t 1 + et , where

Yt
Zt

A 1= 0.8 0.2
0.2 0.8

and

. Check the stability of VAR given above

i. Recover

the

coefficients

B X t=C 1 X t1 + t ,
t =

yt
zt

( )

given

in

B=

where

e 1t = yt + 0.5 zt

the

1 b12
b 21 1
and

primitive
,

C1 =

system:

c 11 c 12
c 21 c 22

and

e 2t = zt

Solution: For stability find eigen values of A 1 (you

should get 1, and 0.6 and VAR is not stable)
e1 t
+0.5 zt
1 0. 5 yt
1
= yt
Given
=
. Since e t=B t
0 1 zt
e2 t
zt

[ ][

we

have

][

] [

][

1 0.5
0 1

a11 a12
1 b 12 c 11 c12
=
a21 a22
0
1
c21 c22

A1

and b12=0. 5
my notes for details)

][ ]

therefore

b12=0. 5 .

Now

substituting the known values of

we can get the coefficients of

C1 (see

ii. Discuss the shape of impulse response function of Y t due

to a one unit shock in yt and zt . Find the impact
multiplier for the time
period t=0, 1, 2.
Soultion:

There are different approaches to calculate the impulse

response. All these approaches should give same results. It
is easy to calculate for a first order VAR.

()[

]( ) [

Yt
Y
= 0.8 0.2 t 1
0.2 0.8 Z t 1
Zt

Given

][ ]

1 0. 5 yt
0 1 zt

Impulse responses due to one unit shock in yt keeping all

others as zero we can get the IR for t=0,1,2 as follows;
t =0
( y0 =1Y 1 = Z 1= z 0=0 )

[ ] []
y0
z 0

1
0

( )[

][ ] [ ]

Y0
= 1 0.5 1
0 1 0
Z0

1
0

t =1
( y1=0, z 1=0Y 0 = 1, Z 0= 0)

( )[

][ ] [ ]

Y1
= 0.8 0.2 1
0.2 0.8 0
Z1

0.8
0.2

t =2
( y2=0, z 2 =0Y 1 = 0.8, Z 1=0.2 )

( )[

][ ] [ ]

Y2
= 0.8 0.2 0.8
0.2 0.8 0.2
Z2

0.68
0.32

Similarly Impulse responses due to one unit shock in

zt

keeping all others

as zero we get
t =0
( z 0=1Y 1 = Z 1= y 0=0 )

[ ] []
y0
z 0

0
1

( )[

][ ] [ ]

Y0
= 1 0.5 0
0 1 1
Z0

0.5
1

t =1
( y1=0, z 1=0Y 0 = 0.5, Z 0=1 )

( )[

][ ] [ ]

Y1
= 0.8 0.2 .5
0.2 0.8 1
Z1

0.6
0.9

t =2
( y2=0, z 2 =0Y 1 = 0.6, Z 1=0.9 )

( )[

][ ] [ ]

Y2
= 0.8 0.2 0.6
0.2 0.8 0.9
Z2

0.66
0.84

Response of Y due to
Period
yt
zt
Response of Z due to
Shocks in

0
1
0.5

1
0.8
0.6

2
0.68
0.66
Period

yt
zt

Shocks in

0
0
1

1
0.2
0.9

2
0.32
0.84

(I hope you can easily interpret the above table)

iii. What would be shape of impulse response function if

e 1t = yt and e 2t =0.5 z t + y t
(Repeat the steps in (ii))
Y t = Y t1 + t

3. Consider

t =

( )
1 t
2 t

where

( )

Y t=

Y 1t
Y 2t

= 1/ 8 1/32
1/2 1 /8

and

.
i. Obtain the eigen values of

? (3 marks)

Solution: eigen values are -0.25 and 0

ii. What is the rank of ? (2 marks)
Solution: Rank= No of non zero eigen values=1
iii. How many cointegrating vectors are there in this case?
Solution: One (see text and notes for details)
iv. Obtain the VAR in level corresponding to this ECM

 Y t = Y t1 + t =>Y tY t 1= Y t1 + t this can be

written as Y t =A 1 Y t 1+ t where A 1= + I
7 /8 1 /32
A 1=
1/2 7 /8
v. Given the VAR in level Y t =A 1 Y t 1+ t state the condition
for cointegration in terms of the eigen values of A 1 and
verify
Solution: Find the eigen values of A 1 it will be 0.75
Solution:

and 1.

4. Given the estimated Eigen values

^ 4=0.0434

obtain

max

^1=0.4332, ^ 2=0.1776, ^3=0.1128

trace

and

and

and test for cointegration Rank ( No

of observation T=53, No of endogenous variable k=4) [5% critical values for

max

test for the null of number of cointegrating rank i.e., r=0 , r 1, r 2,r 3, are
28.14, 22.00, 15.67 and 9.24 respectively. The 5% critical values for

trace

test are

53.12,34.91,19.96 and 9.24]

Solution: See Enders for details (same example is discussed in
the text).
5. Johansen estimated a money demand function

mdt =0 + 1 y t + 2 i bt + 3 i dt + et

using 55

observations of quarterly data (1974Q1 to 1987Q3) of Danish economy. ( m t =real money

(M2),

y t =real output, i dt = bank deposit rate i bt =bond rate. Cost of holding money is

assumed to be the difference between ,

i dt and i bt but included both rates unrestricted in the

equation). He tested cointegration among these variable using

trace and

max

i. Table below reports eigen values and 5% critical values(c.v.) of Johanesn test for
cointegration rank. Calculate the

trace and

max . The alternative

hypotheses of these tests are not given in the table. Specify the alternative
hypothesis and interpret the results. [Please present the results in the Table format
given below and write the interpretation below the Table] I estimated the VECM
using 2 lags hence the number of observations is reduced to 52 from 55. why?
Table 1 Johansen test for cointegrating Rank
Eigen Values
0.427
0.229

H0
r=0
r1

Trace ( trace )
H1
trace 5% c.v.
47.86
29.80

Maximum eigen ( max )

H1
max 5% c.v.
27.58
21.13

0.109
0.022

r2
r3

15.49
3.84

14.26
3.84

Solution: See my notes alternative hypothesis and

calculation of test statistics
( one observations is lost due to differing and two
due to lagging)
ii.

Johansens' estimated results for long run money demand function are given
below:

mdt =6.143 +1.013 y t +3.99 i dt 4.98 ibt + et

(3.28 )

(8.80)

(4.16)

(10.20)

with adjustment

parameters:

m=0.325 (3.02 ) ; y =0.076 ( 0.77 ) ; i =0.026 ( 1.10 ) ; i =0.013(0.37)

b

. . t statistics are given in parenthesis. Interpret the results.

Solution: long run money demand function is given above.

Interpret it using theory. For the interpretations of speed of
adjustment see its significance level. Only m is significant at
conventional level, hence only money is adjusting to correct the
disequilibrium.
(These solutions are indicative in nature. Explain in detail in exams)
+6