ADVANCED ECONOMETRICS ASSIGNMENT 4

NAME: Sruti Suhasaria

ROLL NO: 212PGE020

Q) Use the attached data on future and spot prices of Cardamom and find the cointegration
between future and spot prices, Estimate the VECM considering futures as the dependent
variable. Present the result in a table format and interpret the results.

GRAPHS:
The table below depicts the graph of future prices of Cardamom
The table below shows the graph of spot prices of Cardamom
On combining both future and spot prices of Cardamom, we get the above graph which
depicts clearly that the two graphs overlay each other and move together.

AUGMENTED DICKEY FULLER TEST:

Futures Unit Root Test-

Null Hypothesis: FUTURES has a unit root

Exogenous: Constant
Lag Length: 1 (Automatic - based on SIC, maxlag=27)
t-Statistic   Prob.*

Augmented Dickey-Fuller test statistic -1.950482  0.3092

Test critical values: 1% level -3.432645
5% level -2.862440
10% level -2.567294

We fail to reject the null hypothesis because p value is greater than 0.05
Future prices of cardamom is not stationary at I(0)

Null Hypothesis: D(FUTURES) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=27)
t-Statistic   Prob.*
 Augmented Dickey-Fuller test statistic -45.22578  0.0000
Test critical values: 1% level -3.961534
5% level -3.411517
10% level -3.127620

We reject the null hypothesis as the series is stationary at I(1)

Hence, future prices of cardamom is I(1) series according to ADF test.
Unit root test of spot-

Null Hypothesis: SPOT has a unit root

Exogenous: Constant
Lag Length: 4 (Automatic - based on SIC, maxlag=27)

t-Statistic   Prob.*

Augmented Dickey-Fuller test statistic -1.797311  0.3822

Test critical values: 1% level -3.432647
5% level -2.862441
10% level -2.567294

We fail to reject the null hypothesis because p value is greater than 0.05
Spot price of cardamom is not stationary at I(0)

Null Hypothesis: D(SPOT) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 3 (Automatic - based on SIC, maxlag=27)

t-Statistic   Prob.*

Augmented Dickey-Fuller test statistic -22.01319  0.0000

Test critical values: 1% level -3.961538
5% level -3.411519
10% level -3.127621

We reject the null hypothesis, then the series is stationary at I(1)

Therefore, spot prices of cardamom is I(1) series according to ADF test

Engle-Granger Cointegration test:

The above table shows that when we take either spot or future values as dependent variable
there is a cointegration relation or there exists a long run relationship.

VAR Lag Order Selection Criteria:

From the above table we can conclude that we can have a maximum of 2 lags

Vector Error Correction estimate (VECM):

From the above table we can see that when spot price increases by 1% then the future
prices increases by 0.92% or if spot price increases by 10% points then the future price
increases by 9% points. Hence, it is significant.

the cointeq1 term shows that approximately 3% is adjusted by future price and
approximately 2.5% is adjusted by the spot price. A total of 5.5% is adjusted in a day.
Therefore, it takes around 18-19(18.18 exact) days to achieve equilibrium when there is a
short run equilibrium. There also exists a bi-directional causality between the future price
and the spot price.