Augmented Dickey-Fuller Unit Root Test Research Articles

Impact of Financial Liberalization on Economic Growth: A Case Study of South Africa

Financial liberalization plays a major role in stimulating economic growth. In light of this, the paper examines the impact of financial liberalization on macroeconomic performance in South Africa by using time series econometric analysis over the time period 1990-2011. The study uses GDP, the dependent variable as a measure of economic growth and the following macroeconomic variables: inflation, lending rate exchange rate and financial deepening (M2/GDP) as financial liberalization indices. To confirm the order of integration, the Augmented Dickey-Fuller and Phillips Perron unit root tests are employed. The study uses the Johansen co-integration and the Error Correction Mechanism to obtain long run and short run coefficients. Findings of the study are that inflation, lending rate and financial deepening have positive influence on economic growth whilst exchange rate has a negative impact on economic growth. This study recommends that the government should put in place measures that stimulate investments with fair lending rates so as to deepen the financial system which in turn promotes economic growth. DOI: 10.5901/mjss.2014.v5n23p238

The Impact of Inflation on the Automobile Sales in South Africa

This paper analyses the relationship between inflation (INF) and Automobile sales in South Africa by using the co-integration and causality tests. The analysis has been conducted using monthly data over the period 1960:1 through 2013:9. The Augmented Dickey-Fuller Unit Root test indicates that the two series are stationary in the first-difference not in level. The Johansen-Juselius co-integration test show that INF and new vehicle sales (NVS) are co-integrated in the long run, hence, long-run equilibrium exist between the two variables. This study, using the Granger-Causality test has found that there is one-way causal effect (unidirectional causality) running from INF to NVS at 5% level of significance. Given that the automotive industry contributes 6% to the country’s Gross Domestic Product (GDP) and creating more than 300 000 jobs, South Africa must double its efforts in managing inflation at very low levels. DOI: 10.5901/mjss.2014.v5n7p200

External Debt and Domestic Investment in Pakistan: A Cointegration Analysis

The present study explores the impacts of foreign capital inflows in terms of external debt, foreign direct investment and worker’s remittances on domestic investment in Pakistan economy for the period of 1972-2007. Since the study utilizes the time series data of the sample period so augmented Dickey-Fuller unit root test has been employed to find out each of the time series variables to be stationary at their first difference. The Johansen cointegration confirms two cointegrating vectors and all of explanatory variables show positive and significant impact on domestic investment in long run. The Granger causality test results, based on the VECM, confirm long run and short run causality from external debt, foreign direct invest and worker’s remittances to domestic investment. The diagnostic and stability tests conclude the model to be valid and stable. The study also provides some policy recommendations.

Unit Root Tests for ESTAR Models

Since the introduction of augmented Dickey–Fuller unit root tests, many new types of unit root tests have been developed. Developments in nonlinear unit root tests occurred to overcome poor performance of standard linear unit root tests for nonlinear processes. Venetis et al. (2009) developed a unit root test for the k-ESTAR(p) model where k is the number of equilibrium levels and p is the order of autoregressive terms. Their approach may cause a singularity problem because some of the regressors might be collinear. To overcome the problem, they move collinear regressors into the error term. This paper extends the work of Venetis et al. (2009). Using a new approach given in this paper, the singularity problem can be avoided without worrying the issue of collinearity. For some cases, simulation results show that our approach is better than other unit root tests.

Revenue Allocation and Economic Development in Nigeria

This study empirically examines the impact of revenue allocation on economic development in Nigeria. Specifically, the study looks at how the various revenue allocations to the three tiers of government affect real gross domestic product (RGDP) in Nigeria using time series data for the period 1993 to 2012. Error correction model (ECM) and Pairwise Granger Causality test are used in analyzing the data. The study carries out test of stationarity of the variables using Augmented Dickey–Fuller unit root test and test of long-run relationship among the variables using Johansen Cointegration test. The study’s findings show that revenue allocations have significant causal relationship with economic development in Nigeria, with only revenue allocation to states having significant negative relationship. Unidirectional causality runs from revenue allocations to real GDP in Nigeria. All variables of the study are cointegrated and have a long-run relationship that 87.62% of the short-run disequilibrium is corrected yearly. The study recommends among others that more financial control and value for money audit should be carried out to minimize wastages and corruption in the states of the federation, so as to change the direction of influence of states’ revenue allocation on economic development.

Does Agriculture Matter for Economic Development? Empirical Evidence from Nigeria

In this study we aimed at answering the question, ‘Does agriculture matter for economic development in Nigeria?’ Life expectancy is modeled against agricultural output and agricultural expenditure, amongst other variables. Agricultural output is also modeled against a host of socio-economic, natural and human factors, which influence agricultural productivity. Applying Augmented Dickey-Fuller unit root test, Ordinary Least Squares, and the Newey-West method on secondary data and dummy variable used in the study, it was found that agricultural output has negative and significant impact on life expectancy in Nigeria. The impact of agricultural expenditure was found to be positive but nonsignificant. Real gross domestic product and industrial output were also found to influence life expectancy. Careful examination of the hypothesized socio-economic factors (political instability and industrial output), natural factor (rainfall), and human factor (carbon emission) showed that only industrial output and rainfall matter for agricultural output in the country: both variables have positive impacts on agricultural output. The study submits that as much as agriculture may matter for economic development, reliance on the sector alone without corresponding and simultaneous development of other crucial sectors such as education, health, and industry will not yield positive fruits for economic development in Nigeria.

Causal Analysis on the Contribution of Agriculture Sector on Economic Growth: The Case of Malaysia and New Zealand

A causal relationship exists between agriculture and economic growth. This study investigates the relationship between agriculture value added (AGRI) and real gross domestic product (RGDP) for the case of Malaysia and New Zealand. This study employs the annual time series data from 1977 to 2009. The study also briefly explains the difference in the agriculture policies in both countries. The methodology of this study adopted the Augmented Dickey Fuller and Dickey-Fuller unit root tests, Johansen-Juselius cointegration test and Vector Error Correction Model (VECM). Results show that there is no long run relationship for New Zealand and Malaysia. However, it is indicated that there exist a one-way causality from RGDP to AGRI in the case of Malaysia and two-way causality in the case of New Zealand in the short-run. Hence, the results proved that the economy for both countries, Malaysia and New Zealand are not dependent on the agriculture sector in the long-run.

Foreign Institutional Investment and Stock Market Returns: Evidence from Indian Capital Market

This study investigated the effect of foreign institutional investment (FII) on the returns of Indian stock market using monthly data collected over the period from January 1993 to May 2012. By applying augmented Dickey-Fuller unit root test, Johansen cointegration test, Granger causality test and vector error correction model (VECM), this study found that FII and Sensex are level and first difference stationary series, respectively. It also found positive long-run equilibrium relationship between stock market index and FII. The study also revealed bidirectional causality between stock market index and FII. This study formulated VECM, which can be used for the estimation purpose. The major implication that this study derived is that foreign investments play a beneficial role in the development of the Indian economy and, therefore, the Indian government should try to maximise net foreign investment. The results obtained in this study were based on the monthly data of Sensex and FII; therefore, one needs to be cautious before generalising the results. For future research, one may consider other Indian stock market indices, sector indices and individual companies. Even more robust analysis can be done by reducing the frequency of data, which will help in validating the result of this study.

The Contribution of Economic Sectors to Economic Growth: The Cases of China and India

China and India have recently achieved spectacular economic growth where GDP per capita grows rapidly in both countries. Thus, this study examines the contribution of economic sectors to economic growth in both countries by using time series data from 1978 to 2007. Three economic sectors were analyzed: agricultural sector, manufacturing sector and services sector. Augmented Dickey-Fuller (ADF) unit-root test shows that the time series data are stationary at first difference. Then, correlation analysis indicates that each economic sector has strong, positive and significant linear relationship with economic growth in China and India. In addition, the results of multiple regression analysis show that agriculture, manufacturing and services sectors have positive relationship with GDP per capita in China and India. However, the contribution of economic sectors to economic growth differs in China and India. Manufacturing sector contributes the highest to China’s economic growth while services sector is the highest contributor to India’s economic growth.

Econometric Analysis of Import and Inflation Relationship in Turkey between 1995 and 2010

In economics, the relation between import volume and inflation rate has been discussed several times for different countries. This study investigates the relationship between inflation and import volume by using monthly time series data for the Turkish economy over the period 1995-2010. The study applies a number of econometric techniques: Augmented Dickey-Fuller unit root test, univariate cointegration test, error correction model, and Granger causality test. The results of this dissertation show that there is long term and short term co-integration relation between inflation and import volume. Indeed, there is one-way Granger-causality from import to inflation.

Do energy prices converge across Russian regions?

This paper tests for price convergence in Russian energy markets from January 2003 to October 2010. Monthly energy prices for four energy products (diesel, gasoline, electricity and coal) for 83 Russian regions are drawn from Russia's statistical agency Rosstat. The study contributes to the existing literature by using the Exponential Smooth Auto-Regressive Augmented Dickey–Fuller unit root test in a panel setup, which encompasses cross-section dependence. We find that there are no fully integrated national energy markets in Russia, possibly due to the peripheral position of diverging regions, unbalanced distribution of energy reserves and limited cross-border transmission capacity.

Economic Integrations and Purchasing Power Parity Assumption

The goal of the paper is to investigate in which way economic integration and economic relations affect mean reverting properties of real exchange rates. We have employed unconstrained and constrained augmented Dickey-Fuller unit root test and Im Pesaran Shin panel unit root test in order to investigate mean reverting properties of real exchange rates in transition, ASEAN, MERCOSUR countries and China vis à vis Germany and the USA. Our analysis is interesting due to the fact that it provides evidence of the impact of (further) integration on the problems with price competitiveness in EU and EMU periphery countries. Evidence suggests that economic relations of ASEAN and MERCOSUR countries vis à vis the USA and transition countries vis à vis Germany are affecting mean reverting properties of relative exchange rates. In all three groups of countries evidence of stationarity of real exchange rates is much stronger vis à vis major economic partner.

Testing the weak form efficiency of the Turkish stock market

This paper examines the random walk hypothesis to determine the validity of weak-form efficiency for the Istanbul Stock Exchange (ISE) in Turkey. Data are obtained from daily observations of the ISE indices (ISE-100 index, services index, financial index, industrial index and technology index) for the period October 23, 1987 to July 15, 2011. The random walk hypothesis is tested using parametric and non-parametric tests. The parametric tests include Augmented Dickey-Fuller unit root test, serial autocorrelation test and variance ratio test. The nonparametric tests include Phillips-Peron unit root test and runs test. The empirical results of this study showed that Turkish stock market is weak-form inefficient. With the exception of the results from runs test for both services and technology indices, results from runs test, serial autocorrelation test and variance ratio test are similar and reject random walk hypothesis for Turkish stock market. However, Turkish stock market is inefficient at the weak level; as a result, this is likely to be an evidence that the prudent investor who deals with Turkish stock market will achieve abnormal returns using historical data of stock prices. Key words: Efficient market hypothesis, weak-form efficiency, the Istanbul stock exchange, parametric and non-parametric tests.

Testing the Harrod Balassa Sameulson Hypothesis: The Case of Pakistan.

For a small open economy of Pakistan, exchange rate is determined through the two alternative theories; the nominal theory of exchange rate named by Purchasing Power Parity (PPP) and the real theory known as Harrod Balassa Sameulson (HBS). According to the requirements of theories, two kinds of real exchange rate have been employed for the yearly data of 1972-2008. As, both of the theories are disputed at the ground of their long run relationship with real exchange rate, therefore, the VAR based Johenson Co-integration approach has been utilised to see the long run relationships. PPP has shown less satisfactory results either in its form of absolute version or relative version. Because, real exchange rate in Pakistan is a non-stationary process by Augmented Dickey Fuller unit-root test, predicting some pushing force behind the non-tradable sector. While favouring the PPP in tradable sector, the ADF and KPSS are indicating the presence of the HBS in Pakistan. On the other hand, the analysis of the HBS through co-integration is showing that relative productivity difference has an opposite relationship with relative non-tradable sector prices and with RER. However, the relationship between relative non-tradable sector prices and RER is much stronger and according to the theory. So, there have been incorporated some demand side and external factors to reduce the mis-specification of the simple HBS model. Therefore, in the extended HBS model, productivity difference, government consumption expenditure, terms of trade and world oil prices are appreciating the RER and money supply (a control variable) is pursuing depreciation in RER. So, these results yield some policy implications for Pakistan which can be useful for developing countries as well. JEL classification: E0, E31, E44 Keywords: Harrod-Balassa-Samuelson, Exchange Rate, Purchasing Power Parity, Pakistan

DO REAL INTEREST RATES REALLY CONTAIN A UNIT ROOT? MORE EVIDENCE FROM A BOOTSTRAP COVARIATE UNIT ROOT TEST

AbstractThis paper re‐examines the empirical finding that international real interest rates usually have a unit root. This conclusion is put forth in Rapach and Weber (2004), using the Ng and Perron (2001) tests. We use Rudebusch's (1993) approach to construct the small sample distributions of the Ng and Perron tests, and calculate their asymptotic sizes, size‐adjusted powers and rejection rates. These numbers show that the lack of power in the Ng and Perron tests might account for the findings of Rapach and Weber (2004): that the unit root null cannot be rejected for most OECD countries. Size distortions are mild in the case of Ng and Perron tests for two series, but are serious for the Phillips and Perron Z‐test on inflation rates. We then apply a powerful covariate augmented Dickey–Fuller unit root test to examine the series for which stationarity cannot be determined with the Ng and Perron tests. The bootstrap technique is also used to control possible size distortions. In contrast to the results of Rapach and Weber (2004), the bootstrap covariate augmented Dickey–Fuller test yields striking evidence that real interest rates are stationary for 14 of 16 OECD countries, because nominal interest rates are stationary for the 14 countries, while inflation rates are stationary for all countries.

Implications Of Mixed Results With Cointegration Models In International Studies

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">While cointegration models have been used extensively in many fields (such as in testing for stock market predictability), there have been mixed results from using cointegration models in international studies.<span style="mso-spacerun: yes;">  </span>For example, one study attempted to regress the levels of the general stock market price indexes of Norway, Mexico, Venezuela, and of Oman on the levels of interest rate and oil prices variables during the period 1992 to 1999.<span style="mso-spacerun: yes;">  </span>Attempts to explain mixed results have included distinguishing developed markets versus less developed markets and differences in the volatilities of markets. Another approach has been attempts to improve cointegration methods.<span style="mso-spacerun: yes;">  </span>Some studies have included both bivariate and multivariate methods of cointegration.<span style="mso-spacerun: yes;">  </span>Others have employed augmented Dickey-Fuller unit root tests of the residuals.<span style="mso-spacerun: yes;">  </span>The extent of mixed results in international studies has implications for earlier studies in single countries.<span style="mso-spacerun: yes;">  </span>It is possible that many earlier studies in business and in economics will need to be replicated using newer techniques developed by international researchers.<span style="mso-spacerun: yes;">  </span>The purpose of this study is to explain the attempts to improve cointegration methods, the mixed results in international studies, and the implications for earlier studies relying upon cointegration models.</span></span></p>

Education And Economic Growth In Korea, 1966 To 1997

<p class="MsoNormal" style="text-align: justify; margin: 0in 37.8pt 0pt 0.5in;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Batang;">This paper examines the aggregate production function for Korea, using direct estimates of human capital.<span style="mso-spacerun: yes;">  </span>The contribution of this study possibly provides be affirmation of the myriad role education plays in Korean society, including that of economic growth.<span style="mso-spacerun: yes;">  </span>I have used the Cobb-Douglas production and time series data of physical capital, labor force, and human capital measurements. In terms of an estimation technique, I have used modern time series methods specifically designed to deal with covariance stationary based on the Augmented Dickey-Fuller (ADF) unit root tests.<span style="mso-spacerun: yes;">  </span>To date, these techniques have not been frequently used to explore the nature of quantity and quality human capital variables, physical capital, and labor variables.<span style="mso-spacerun: yes;">  </span>This study has led me to the conclusion that the level of human capital is a significant determinant for economic growth.<span style="mso-spacerun: yes;">  </span>The coefficient for the quality of human capital stock, however, I found to be negative and significant.<span style="mso-spacerun: yes;">  </span>These measures ignore the important role of training and learning through practice, and the productivity effect of the educational curriculum.</span></span></span></p>

English

In economics, the relation between import volume and inflation rate has been discussed several times for different countries. This study investigates the relationship between inflation and import volume by using monthly time series data for the Turkish economy over the period 1995-2010. The study applies a number of econometric techniques: Augmented Dickey-Fuller unit root test, univariate cointegration test, error correction model, and Granger causality test. The results of this dissertation show that there is long term and short term co-integration relation between inflation and import volume. Indeed, there is one-way Granger-causality from import to inflation.

Explaining the long-term real equilibrium exchange rates through purchasing power parity (PPP): An empirical investigation on Egypt, Jordan and Turkey

This study aims at testing the validity of PPP as a long-term equilibrium condition for bilateral exchange rates in three emerging economies of the Middle East, namely Egypt, Jordan and Turkey through the Augmented Dickey-Fuller (ADF), Phillips-Perron (PP), and the Kwiatkowski, Phillips, Schmidt, and Shin (KPSS) unit root tests. Results of the ADF and PP unit root tests indicate that the null hypothesis of non-stationary real exchange rate can not be rejected in all cases implying that PPP fails to hold in all three countries. Using the KPSS test, the null hypothesis of trend stationary real exchange rate can not be rejected in all cases indicating that the real exchange rate in the three countries is stationary when a trend is included. Therefore, PPP in these countries is not sensitive to the choice of the base country but can be influenced by the type of test employed. Key words: PPP, unit root tests, ADF test, KPSS test, PP test.

Purchasing power parity puzzle: evidence from Ghana

This paper tests the validity of Purchasing Power Parity (PPP) doctrine for Ghana using the conventional relative PPP equation. We conducted a univariate Augmented Dickey-Fuller unit root test on the model variables. Exchange rate and CPI data for Ghana and the USA were collected on annual basis for the period between 1970 and 2005 inclusive. The result of the PPP test shows non-rejection of the null hypothesis of the failure of PPP. The result of the unit root test suggests that Ghana's exchange rates are mean reverting. Exchange rates and inflation differentials were found to be stationary at the same order of integration. Consequently, cointegration is suspected between GHANEX and GHANINF, though this paper did not investigate the presence of cointegration because even if it exists, we conclude that there is a long-run relationship between the two variables. Based on the result, it is concluded that a common basket of goods, when quoted in either cedi or dollar is not expected to cost the same in both countries. From the policy point of view, we established that PPP can be used to assess the level of exchange rates.