BEC2034 BASIC ECONOMETRICS

Trimester 1, 2020/2021
Project # 2 Assessment Form
(Deadline: 28 September 2020 (Week 13))

Lecturer’s Name : Tan Siow Hooi

Group Members:

Student Name Student ID

Maryam Mohammad Ali Lagrosa 1171302274

Ibnat Akila 1171300073

Hashwini sevanantham 1171100517

Muhammad Taufiq bin Borhan 1181303199

Muhammad haziq bin ibrahim 1112702069

 Report (4%):
The following Grading Criteria are applied for Written Report:

Criteria Excellent Very Good Fair Poor Total

Good

Question 1(a)

Question 1(b) 20
Question 1(c)

Question 2(a)

Question 2(a)

Question 2(a) 20
Question 2(a)

Question 2(a)

Comments:

Overall Grade:
Project 2
Question 1
.
a) Use the DF/ ADF to test for the nonstationarity of the time series provided,
namely the stock price and your independent variable. Are these series
stationary at their levels or first differences?

Graph Analysis in Stock Price :

Graph Analysis in Silver :

 Table for DF/ADF test results​:

Levels First Difference

Intercept Intercept, None Intercept Intercept, None

trend trend

A: DF / ADF

L (Stock Price) 3.542001 -2.258372 3.980736 -4.825850 -3.705100

-4.072470

L (Silver)
-1.841999 -2.226834 -0.350352 -17.18802 -17.14944 -17.19424

Critical Value 5%

L (Stock Price) -2.873339 -3.428581 -1.942147 -2.873339 -3.428581 -1.942147

L (Silver) -2.873240 -3.428426 -1.942136

-2.873190 -3.428349 -1.942131
Augmented Dickey-Fuller (Level, Intercept)

H0: L(Silver) has a unit root

Ha: L(silver) has no unit root

Rule: Reject H0 if ADF test statistic < -2.873190

Conclusion: Since ADF t-statistic is -1.841999, it is not < -2.873240. Therefore do not
reject H0. L(Silver) has a unit root. It is not stationary at levels.

H0: L(Silver) has a unit root

Ha: L(silver) has no unit root

Rule: Reject H0 if ADF test statistic < -3.428349

Conclusion: Since ADF t-statistic is -2.226834, it is not < -3.428349. Therefore do not
reject H0. L(Silver) has a unit root. It is not stationary at levels.
H0: L(Silver) has a unit root

Ha: L(silver) has no unit root

Rule: Reject H0 if ADF test statistic < -1.942131

Conclusion: Since ADF t-statistic is -0.350352, it is not < -1.942131. Therefore do not
reject H0. L(Silver) has a unit root. It is not stationary at levels.

H0: L(Silver) has a unit root

Ha: L(silver) has no unit root

Rule: Reject H0 if ADF test statistic < -2.873240

Conclusion: Since ADF t-statistic is -17.18802, it is not < -2.873240. Therefore reject H0.
L(Silver) has no unit root. It is stationary at first difference.
H0: L(Silver) has a unit root

Ha: L(silver) has no unit root

Rule: Reject H0 if ADF test statistic < -3.428426

Conclusion: Since ADF t-statistic is -17.14944, it is not < -3.428426. Therefore reject H0.
L(Silver) has no unit root. It is stationary at first difference.

H0: L(Silver) has a unit root

Ha: L(silver) has no unit root

Rule: Reject H0 if ADF test statistic < -1.942136

Conclusion: Since ADF t-statistic is -17.19424, it is not < -1.942136. Therefore reject H0.
L(Silver) has no unit root. It is stationary at first difference.
H0: L(stockprice) has a unit root

Ha: L(stockprice) has no unit root

Rule: Reject H0 if ADF test statistic < -2.873339

Conclusion: Since ADF t-statistic is 3.542001, it is not < -287339 . Therefore do not reject
H0. L(Stockprice) has a unit root. It is not stationary at levels.

H0: L(stockprice) has a unit root

Ha: L(stockprice) has no unit root

Rule: Reject H0 if ADF test statistic < -3.428581

Conclusion: Since ADF t-statistic is 2.258372, it is not < -3.428581 . Therefore do not
reject H0. L(Stockprice) has a unit root. It is not stationary at levels.
H0: L(Stock_price) has a unit root

Ha: L(stock_price) has no unit root

Rule: Reject H0 if ADF test statistic < -1.942147

Conclusion: Since ADF t-statistic is 3.980736, it is not < -1.942147. Therefore reject H0.
L(stock price ) has no unit root. It is not stationary at levels.

H0: L(Stock_price) has a unit root

Ha: L(Stock_price) has no unit root

Rule: Reject H0 if ADF test statistic < -2.873339

Conclusion: Since ADF t-statistic is -4.072470, it is not < -2.873240. Therefore reject H0.
L(Stock_price) has no unit root. It is stationary at first difference​.
H0: L(Stock_price) has a unit root

Ha: L(Stock_price) has no unit root

Rule: Reject H0 if ADF test statistic < -3.428581

Conclusion: Since ADF t-statistic is -4.825850, it is not < -3.428581. Therefore reject H0.
L(Stock_price) has no unit root. It is stationary at first difference.

H0: L(Stock_price) has a unit root

Ha: L(Stock_price) has no unit root

Rule: Reject H0 if ADF test statistic < -1.942147

Conclusion: Since ADF t-statistic is -3.705100, it is not < -1.942147. Therefore reject H0.
L(Stock_price) has no unit root. It is stationary at first difference.
b) From your unit root tests, are these time series integrated of order zero I(0),
I(1) or I(2)? (4 marks)

● At levels L (Stock_Price) is not stationary.

● At first difference, L(Stock Price) is stationary.
➔ Therefore, L(Stock_Price) is integrated of order 1~I(1).

● At levels, L (Silver) is not stationary.

● At first difference, L(Nikkei225) is stationary.
➔ Therefore, L(Silver) is integrated of order 1~I(1).

➢ In Conclusion, Both L(Stock Price) and L(Silver) are integrated of order 1~I(1).

c) Use Engle-Granger (EG) Test to examine whether the two variables are
cointegrated (i.e. a long run relationship exists). Explain your answer.
H0 : Residuals has a unit root
Ha : Residuals has no unit root
Critical Value at 5% = -1.942131
Augmented Dickey-Fuller test startics = 4.135303
Rule : Reject H0 if Augmented Dickey-Fuller test startics < -1.942131
Conclusion : Since Augmented Dickey-Fuller test startics is 4.135303 it is not < -1.942131
Therefore do not reject H0, the residual has a unit root. The two variables in the model are not
cointegrated and the long run relationship does not exist.

Question 2 (20 marks)

a) Provide two reasons for how the stock market is important to economic
growth of a country. Support with two existing literature.
Consider the model:
Ln(GDP)it = β1 + β2*Ln(Stock Market Performance)it + uit

● Masoud.H.M.N (2020) The Impact of Stock Market Performance upon Economic Growth
International Journal of Economics and Financial Issues, Vol. 3, No. 4, 2013, pp.788-79

● Nazir.S.M, Nawaz.M.M & Gilani.U.J(2018)Relationship between economic growth and

stock market development

The first reason is the stock market, where stocks and bonds are exchanged, can be a very
sophisticated marketplace for commodities. At the same time , a good and competitive one is
essential to the creation and development of the economy. In any economy, it is a gateway to
structural transformations; from traditional, rigid, insecure bank-based to a more versatile, more
secure economy that is resistant to shocks, volatility and lack in the confidence of investors. By
performing the following roles, stock markets play an important role in economic growth
processes: enhancing liquidity, aggregating and mobilising resources, exercising corporate
control, providing risk pooling and more .It is said that markets where there are shares, bonds,
cattle or fruit and vegetables, are simply mechanisms to allow the possibility of trade between
individuals or organisations . The second reason stock markets are a network of institutions and
processes by which funds are made available for purposes longer than one year are pooled and
made available to industry , government, and individuals and from which instruments are moved
which are already outstanding. The inventory markets are well structured and within local,
regional , national and global reach. Few articles have established a positive relationship between
economic growth and stock market development. Some also argued that the stock markets can
increase the financial specialist chance, but at the same time provide more openings to financial
specialists to do diversified investment globally. A few think about details that stock advertise
liquidity and measure is vital for growth . In spite of the fact that the investments in capital
markets are much beneficial for investors, speculators don't need to square their reserve funds for
long periods.

b) Estimate the model, pooling all the 60 observations.

c) Estimate the fixed effects model (FEM).

d) Estimate the error components model (ECM).

e) Which is a better model, FEM or ECM? Justify your answer.

Hypothesis
H0 : error component model is appropriate
HA: fixed effect model is appropriate
Chi-square statistic = 2.074960
Chi-square Cv 5% (df=1) = 3.84
Reject H0 if chi square statistic > chi square cv
Conclusion : Do not reject H0
ECM is a better model