MOOC Econometrics

Test Exercise 6
Questions
This test exercise uses data that are available in the data file T estExer6. The question
of interest is to model monthly production of Toyota passenger cars and to investigate
whether the monthly production of all other brands of Japanese passenger cars has
predictive power for the production of Toyota. Monthly production data are available
from January 1980 until December 2000. The data for January 1980 until December
1999 are used for specification and estimation of models, and the data for 2000 are
left out for forecast evaluation purposes.
In answering the questions below, you should use the seasonally adjusted production
data denoted by ‘toyota-sa’ and ‘other-sa’. We will denote these variables by y=
toyota-sa and x = other-sa
(a) Make time series plots of the variables yt and xt, and also of the share of Toyota
in all produced passenger cars, that is yt/(yt + xt). What conclusions do you
draw from these plots?

TOYOTA_SA OTHER_SA

700000,0

600000,0

500000,0

400000,0

300000,0

200000,0

100000,0

0,0
1
9
17
25
33
41
49
57
65
73
81
89
97
105
113
121
129
137
145
153
161
169
177
185
193
201
209
217
225
233
241
249

y/(y+x)
0,45
0,4
0,35
0,3
0,25
0,2
0,15
0,1
0,05
0
71

176
1
8
15
22
29
36
43
50
57
64

78
85
92
99
106
113
120
127
134
141
148
155
162
169

183
190
197
204
211
218
225
232
239
246
It can be seen in the graph that there is a trend in the production of other cars in the
period from July to February of the year 1991, in this period there was an increase in the
production of cars.
In addition to this, it can also be observed that there is a multiplicative trend in the
production of Toyota automobiles between August 1990 and February 1991.

b) (i) Perform the Augmented Dickey-Fuller (ADF) test for yt. In the ADF test
equation, include a constant (α) and three lags of ∆yt, as well as the variable of
interest, yt−1. Report the coefficient of yt−1 and its standard error and t-value,
and draw your conclusion.

∆𝑦𝑡 = 𝛼 + 𝑦𝑡 + 𝛿𝑦𝑡−1 + 𝛿𝑦𝑡−2 + 𝑒𝑖

𝐻0 : 𝛿 = 0, 𝑛𝑜𝑡 𝑠𝑡𝑎𝑡𝑖𝑜𝑛𝑒𝑟𝑦 ; 𝐻1 : 𝛿 ≠ 0, 𝑠𝑡𝑎𝑡𝑖𝑜𝑛𝑒𝑟𝑦

Toyota: 𝑦𝑡−1 = −0,083219

𝑆𝐸 = 0,0368
𝑡 − 𝑠𝑡𝑎𝑡 = 2,262

𝑡 − 𝑠𝑡𝑎𝑡 for Toyota is greater than the critical value of -2.9, therefore the null
hypothesis cannot be rejected and it is not stationary.

(ii) Perform a similar ADF test for xt

𝐻0 : 𝛿 = 0, 𝑛𝑜𝑡 𝑠𝑡𝑎𝑡𝑖𝑜𝑛𝑒𝑟𝑦 ; 𝐻1 : 𝛿 ≠ 0, 𝑠𝑡𝑎𝑡𝑖𝑜𝑛𝑒𝑟𝑦

Other: 𝑥𝑡−1 = −0,06962

𝑆𝐸 = 0,03067
𝑡 − 𝑠𝑡𝑎𝑡 = −2,106

𝑡 − 𝑠𝑡𝑎𝑡 for Other is greater than the critical value of -2.9, therefore the null
hypothesis cannot be rejected and it is not stationary.

c) Perform the two-step Engle-Granger test for cointegration of the time series yt and xt
In step 1, regress yt on a constant and xt . In step 2, perform a regression of the
residuals et in the model ∆et = α + ρet−1 + β1∆et−1 + β2∆et−2 + β3∆et−3 + ωt. What is
your conclusion?

𝐻0 : 𝑛𝑜𝑡 𝑐𝑜𝑖𝑛𝑡𝑒𝑟𝑔𝑟𝑎𝑡𝑒𝑑 ; 𝐻1 : 𝑐𝑜𝑖𝑛𝑡𝑒𝑟𝑔𝑟𝑎𝑡𝑒𝑑

𝑦𝑡 = 26786,43 + 0,45𝑥𝑡 + 𝑒𝑡
𝑦𝑡 − 26786,43 − 0,45𝑥𝑡 = 𝑒𝑡
Regressing ∆𝑒𝑡
∆𝑒𝑡 = 29,99 − 0,29𝑒𝑡−1 − 0,4∆𝑒𝑡−2 − 0,104∆𝑒𝑡−3 + 𝑤𝑡
 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟 𝑖𝑠 0,068 ; 𝑇 𝑠𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐 𝑖𝑠 − 4,306

The critical value from the table of Engle-Granger is 3,4

∴ −4,3 < −3,4 ; We reject the null hypothesis and conclude the data is
cointegrated.

d) Construct the first twelve sample autocorrelations and sample partial

autocorrelations of ∆yt and use the outcomes to motivate an AR(12) model for ∆yt .
Check that only the lagged terms at lags 1 to 5, 10, and 12 are significant, and estimate
the following model: ∆yt = α + P5 j=1 βj∆yt−j + β6∆yt−10 + β7∆yt−12 + εt (recall that the
estimation sample is Jan 1980 - Dec 1999).

∆𝑦𝑡 = 619,04 − 0,62∆𝑦𝑡−1 − 0,30∆𝑦𝑡−2 − 0,26∆𝑦𝑡−3 − 0,27∆𝑦𝑡−4 − 0,23∆𝑦𝑡−5

− 0,12∆𝑦𝑡−6 − 0,13∆𝑦𝑡−7 + 0,04∆𝑦𝑡−8 + 0,04∆𝑦𝑡−9 − 0,26∆𝑦𝑡−10
− 0,04∆𝑦𝑡−11 + 0,22∆𝑦𝑡−12

They are significant because the importance of the values was verified with the p value,
the lagged values that are significant must be less than the p value, which are the lagged
values from 1 to 5, and from 10 to 12.
e) Extend the model of part (d) by adding the Error Correction (EC) term (yt −0.45xt), that
is, estimate the ECM ∆yt = α + γ(yt−1 − 0.45xt−1) + P5 j=1 βj∆yt−j + β6∆yt−10 + β7∆yt−12
+ εt (estimation sample is Jan 1980 - Dec 1999). Check that the EC term is significant at
the 5% level, but not at the 1% level.

∆𝑦𝑡 = 4728,01 − 0,15(𝑦𝑡−1 − 0,45𝑥𝑡−1 ) − 0,52∆𝑦𝑡−1 − 0,19∆𝑦𝑡−2 − 0,16∆𝑦𝑡−3

− 0,18∆𝑦𝑡−4 − 0,13∆𝑦𝑡−5 − 0,27∆𝑦𝑡−10 + 0,25∆𝑦𝑡−12
−0,15(𝑦𝑡−1 − 0,45𝑥𝑡−1 ):

𝑇𝑣𝑎𝑙𝑢𝑒 = −2,16
𝑃𝑣𝑎𝑙𝑢𝑒 = 0,03
𝑆𝐸 = 0,07

f) Use the models of parts (d) and (e) to make two series of 12 forecasts of monthly
changes in production of Toyota passenger cars in 2000. At each month, you should
use the data that are then available, for example, to forecast production for
September 2000 you can use the data up to and including August 2000. However, do
not re-estimate the model and use the coefficients as obtained in parts (d) and (e). For
each of the two-forecast series, compute the values of the root mean squared error
(RMSE) and of the mean absolute error (MAE). Finally, give your interpretation of the
outcomes.

𝑅𝑀𝑆𝐸: − 𝐴𝑅 = 16992 ; 𝐸𝐶𝑀 = 18205

𝐻𝐴𝐸: − 𝐴𝑅 = 14703 ; 𝐸𝐶𝑀 = 1556