Johansen Cointegration Methodology Research Articles

INTERMEDIATING ROLES OF INSTITUTIONAL INFRASTRUCTURE IN THE TRADE OPENNESS-INCLUSIVE GROWTH NEXUS: NEW EMPIRICAL EVIDENCE FROM NIGERIA

Introduction: Inclusive growth (IG) is a revolutionary method for generating and sustaining macroeconomic stability through economic development, social equity, and prosperity. There has been little theoretical and empirical study in Nigeria on analyzing the effects of trade openness on inclusive growth and exploring its determinants. Methods: This study examines the intermediating roles of institutional infrastructure in the trade openness-inclusive growth nexus in Nigeria spanning from 1985 to 2021. The study employed the Johansen Cointegration methodology to confirm the existence of the long-run association while fully modified ordinary least squares (FM-OLS) and dynamic ordinary least squares (DOLS) techniques are used to elucidate the uncertainty in the trade openness-inclusive growth nexus. Results: Consequently, the results of the Johansen Cointegration confirmed the long-run association among variables. The FM-OLS and D-OLS indicate that trade openness enhances growth in Nigeria, suggesting that greater trade openness would foster inclusive growth and remain a focal point for both direct and indirect relations with inclusive growth. The interaction effects of trade openness and institutional infrastructure on inclusive growth show negative and insignificant effects on inclusive growth, demonstrating that institutional infrastructure plays a mitigating influence in the relationship between trade openness and inclusive growth, albeit insignificant at a 5% level. Conclusion and suggestion: The study recommends that Nigeria should pursue policies aimed at improving institutional infrastructures with a way of reducing transactional costs and risks related to trading.

Concessional Debt and Growth in Services Sector of Pakistan

The current study aims to explore the relationship between concessional debt and the services sector growth of Pakistan. The annual time series data for the period 1972 to 2019 has been employed. To find out the stationarity and order of integration, the ADF testis utilized. For the long-run relationship, Johansen's co-integration methodology is employed. The empirical results of the study manifest that growth in the services sector is sensitive to concessional debt in the long run. All other explanatory variables also demonstrated a positive and significant effect on services sector growth. VECM method is applied for short-run analysis. The lag of concessional debt is also positive in the short run. A negative and statistically significant lag of error correction term (ECT-1) reasserts the long-run relationship between services sector growth and concessional debt along with other explanatory variables.

Long- and Short-Run Dynamics between South African Hedge Funds and the Equity Market

The hedge fund industry in South Africa has undergone positive changes in terms of both regulation and structure since 2007. These changes have provided an opportunity to further utilize hedge fund strategies within a portfolio management framework. This is especially significant when considering the diversification potential that hedge funds may have and their ability to generate an alternative source of return, both of which are important when considering tactical and strategic asset allocations. There is therefore a need to model the interrelationships between the major hedge fund strategies and the local equity market in order to understand the dynamic linkages that may be present in both the long and short term. We conducted cointegration analysis within the VAR framework on monthly data spanning from 2007 to 2018. The analysis of long-term dynamics indicated that there is no cointegration between the All Share Total Return Index and the hedge fund strategy return indexes as measured under a Johansen cointegration methodology. Pairwise Granger causality tests supported the cointegration findings with no directional causal impacts found. The analysis of short-term dynamics via impulse responses indicated limited causality between the hedge fund indexes and the equity market, while variance decomposition showed few spill-over effects from the equity market to the hedge fund indexes. The overall findings imply that a South African investor could achieve diversification benefits in both the short and long term by adding hedge funds to an equity-centric portfolio. The findings also provide evidence that hedge funds can be used as effective components within tactical and strategic asset allocation. <b>TOPICS:</b>Real assets/alternative investments/private equity, emerging markets, risk management, VAR and use of alternative risk measures of trading risk, quantitative methods, statistical methods <b>Key Findings</b> ▪ There is no long-term equilibrium relationship between the returns of South African domiciled hedge funds and the equity market. This is supported by both cointegration and Granger causality analyses. ▪ Hedge funds provide investors with diversification benefits in both the short and long term when added to an equity-centric portfolio. ▪ The results support the use of hedge funds in both tactical and strategic asset allocation.

Non-Oil Exports and Manufacturing Sector Growth in an Oil-Rich Country in Africa

Purpose: This paper presents an analysis of the effect of non-oil exports on the manufacturing sector growth in an oil-rich country in Africa – Nigeria from 1986 to 2018. In clear terms, we evaluated how manufacturing sector capacity utilization is affected by non-oil exports.&#x0D; Methods: The Ordinary Least Square (OLS) estimation technique was applied in estimating the model and was lagged by two years. The long-run relationship was determined using the traditional Johansen co-integration methodology. How manufacturing sector growth is affected by non-oil exports was evaluated using the Granger Causality technique. The Augmented Dicky-Fuller (ADF) and Phillips-Perron tests were applied to check the stationarity properties of the data.&#x0D; Results: The growth in the manufacturing sector in Nigeria has not been significantly affected by non-oil export despite the various non-oil export promotion strategies initiated by the government.&#x0D; Implication: A major implication of the finding is that the cost and access to financial services for non-oil exporters should be reduced or relaxed by the Central Bank of Nigeria. High-interest rates charged by commercial banks and little disbursement characterized by the volume of commercial banks credit affect manufacturing firms concerning acquiring modern plants and machinery which results in a poor quality of non-oil exports.

Is there an export‐ or import‐led growth in emerging countries? A case of BRICS countries

The BRICS economies could be considered a world number one trading group in one respect and emerging economies in another. The study applied both Johansen cointegration methodology for the long‐run relationship and Granger causality test for the direction of causality for the period of 1979–2018. The study findings confirmed that the growth‐led exports (GLE) hypothesis model is relevant for India, South Africa, and China, while exports‐led growth (ELG) hypothesis model is relevant for both Brazil and Russia. The growth‐led imports (GLI) hypothesis model is relevant for Brazil, India, China, and South Africa, while import‐led growth (ILG) hypothesis model is relevant for Russia. Hence, based on the findings, we confirmed that trade‐led growth hypothesis is valid. Finally, the results show that domestic and global demand contributes to a larger trade; countries that are labor‐abundant generate employment and foster economic growth.

International trade, foreign direct investment, economic growth and CO&lt;SUB align="right"&gt;2 emissions: a study of India

This paper examines the relationship of CO2 emissions with economic growth (EG); foreign direct investment (FDI); and international trade indicators, i.e., imports and exports; in Indian context. Johansen cointegration methodology is used to examine the existence of long-run relationship between variables. Results indicate the existence of an inverted U-shaped curve in India, i.e., the EKC hypothesis and of the N-shaped curve too, as far as the CO2-EG relationship is concerned. Results also indicate that FDI is one of the determinants of CO2 emissions in India. Imports have negative effects on CO2 emissions, while exports contribute to CO2 emissions in India.

International trade, foreign direct investment, economic growth and CO&lt;SUB align="right"&gt;2 emissions: a study of India

This paper examines the relationship of CO2 emissions with economic growth (EG); foreign direct investment (FDI); and international trade indicators, i.e., imports and exports; in Indian context. Johansen cointegration methodology is used to examine the existence of long-run relationship between variables. Results indicate the existence of an inverted U-shaped curve in India, i.e., the EKC hypothesis and of the N-shaped curve too, as far as the CO2-EG relationship is concerned. Results also indicate that FDI is one of the determinants of CO2 emissions in India. Imports have negative effects on CO2 emissions, while exports contribute to CO2 emissions in India.

Toward a Wider Analysis of Market Definition: Theory and Evidence from the Turkish Telecommunications Industry

:This article develops a novel approach to the analysis of market definition. The article empirically investigates the main components of market definition, such as market power, substitution, and the simultaneous interaction between the demand and its determinants for the fixed and mobile voice services. To this end, I employ the multivariate Johansen cointegration methodology and analyze the Turkish voice telecommunications industry. While the VECM analysis confirms the presence of a simultaneous long-term causality relationship among the variables, the Johansen normalization results reveal demand elasticities that enable the analysis of market power and fixed-to-mobile substitution. My findings suggest that the fixed and mobile voice services, which are traditionally viewed as separate markets, can be defined as products that compete in the single market.

Money Demand in Rwanda: A Cointegration Analysis 2008Q3-2015Q4

This paper estimates the demand for money in Rwanda over the 2008Q3 to 2015Q4 period via unit root and cointegration methods. Utilizing the Johansen cointegration methodology, it establishes that a long-term relationship exists among the included variables. The paper also estimates an error correction model (ECM) as well as a vector error correction model (VECM), extending previous analyses by testing for Granger causality among the variables. It finds that the narrow definition of money, M1, serves as a relatively better measure of the money aggregate than M2, and M3. The long-term interest rate (LKRR) also seems to provide relatively better results than the short-term rate (LRR, and LTR) when we use broad money definition, M2. Both the ECM and VECM for M1, narrow definition of money estimates showed the expected signs, in the ECM model as expected LM1 and LGDP were positively related while LM1 and LKRR, LRR, and LTR were negatively related. The adjustment coefficient in the ECM showed that about 79.75 % of disequilibrium is corrected in each quarter. Impulse response functions suggest that the traditional money demand function, which places LM1 as its ‘dependent’ variable while including income and interest rates as its regressors, was stable with little responses in the specific case of Rwanda over the period under review.

Money Demand in Korea: A Cointegration Analysis, 1973-2014

&lt;p class="ber"&gt;This paper estimates the demand for real money in Korea over the 1973Q3 to 2014Q4 period via unit root and cointegration methods. Utilizing the Johansen cointegration methodology and the Pantula principle, it establishes that a long-term relationship exists among the included variables. The paper also estimates an error correction model (ECM) as well as a vector error correction model (VECM), extending previous analyses by performing forecasts and testing for Granger causality among the variables. It finds that the broader definition of money, M2, serves as a relatively better measure of the money aggregate than M1 when evaluating the stability of the real demand for money. The long-term interest (LR) rate also seems to provide better results than the short-term rate (SR), which is consistent with economic theory given that it refers to a long-run equilibrium relationship. Both the ECM and VECM estimates showed the expected (and significant) signs on the coefficients; LM2 (LM1) and LGDP were positively related and LM2 (LM1) and LR (SR) were negatively related. Granger block causality tests and impulse response functions together seem to suggest that the traditional money demand function which places M as its ‘dependent’ variable, while including income and interest rates as its regressors, was a robust and stable model in the case of Korea.&lt;/p&gt;

Estimating energy conservation potential in China's commercial sector

With low energy intensity and great potential for growth, the commercial sector has become one of the key sectors for energy conservation and emission reduction in the context of China's rapid urbanization process. Based on the EIA (Energy Information Administration) statistical methods, this paper calculates the energy consumption of China's commercial sector from 1981 to 2012, specifies the determinants of commercial energy demand, forecasts future energy consumption and estimates the energy conservation potentials using the Johansen co-integration methodology. The results indicate: (i) GDP (Gross Domestic Product) and urbanization have positive effects on the energy consumption of the commercial sector while labor productivity and energy price contribute to reduction in the sector's energy consumption. (ii) Under the basic scenario, energy consumption of the commercial sector will be 317.34 and 469.84 Mtce (million tons of coal equivalent) in 2015 and 2020 respectively. (iii) Under the moderate and advanced scenario, about 187.00 and 531.45 Mtce respectively of the energy consumption of the commercial sector can be conserved from 2013 to 2020. The findings have important implications for policy-makers to enact energy-saving policies.

The Relationship among International Trade, Financial Development and Economic Growth: The Case of Pakistan

Abstract This study is conducted to investigate the relationship among international trade, financial development and economic growth in Pakistan. The ADF and PP tests are used to check the order of integration of the variables and Johansen co-integration methodology is employed to investigate the long run relationship among these variables. The direction of causality between variable is tested by Granger causality test. It is found that all of the variables are non-stationary and the analysis confirm for a long run relationship among international trade, financial development and economic growth. The results indicate that international trade and financial development spur economic growth in Pakistan.

Electricity demand and conservation potential in the Chinese nonmetallic mineral products industry

As the high energy-consuming manufacturing industry, electricity consumption of nonmetallic mineral products in China accounted for 7.93% of industrial, 5.84% of national and 1.33% of global electricity consumption in 2010. This study attempts to specify the determinants of sectoral electricity demand, forecast future electricity consumption by creating a model using the Johansen cointegration methodology and estimate the sectoral electricity conservation potential. Results indicate that GDP per capita is the leading force explaining the sectoral electricity consumption increase, while value-added per worker, R&D intensity and electricity price are the main factors contributing to the sectoral electricity consumption decrease. Results demonstrate that sectoral electricity consumption in 2020 will be 369.79–464.83billionkWh under the low-growth scenario and 530.14–666.39billionkWh under the high-growth scenario. Moreover, under the low-growth scenario, the sectoral electricity conservation potential in 2020 will be 33.72–95.03billionkWh, accounting for 0.45–1.26% of China's total electricity demand in 2020; under the high-growth scenario, the sectoral electricity conservation potential in 2020 will be 48.34–136.24billionkWh, accounting for 0.26–0.74% of world's total electricity consumption in 2010 respectively. Finally, we provide some policy recommendations for encouraging energy conservation in China's nonmetallic mineral products industry.

Monetary Policy and Real Currency Appreciation: A BEER Model for the Mexican Peso

A notable feature of the Mexican economy since the late 1980s was the persistent real appreciation of the peso. The appreciation – a key development that helps to explain Mexico's slow rate of economic growth – took place despite changes in the exchange-rate regime, yet with an unchanging focus of monetary policy on gradually reducing the inflation rate. Thus, the frequent assumption that only real-side variables (as opposed to monetary ones) have a lasting or ‘long-run’ effect on the real exchange may not suit the recent Mexican case. The paper presents the results of an econometric study of exchange rate determination in Mexico for the period 1990Q1–2006Q4. The study is based on the so-called BEER (Behavioral Equilibrium Exchange Rate) model, which relies on Johansen's cointegration methodology and jointly considers real-side and monetary determinants. The estimation results – in the form of two- and three-equation cointegration models – show that, controlling for the influence of real-side determinants, the peso–dollar interest differential had a statistically and economically significant long-run effect on the peso's real exchange rate.

Optimal portfolios: are they optimal for the long run?

This study analyses the potential for diversification among assets as suggested by modern portfolio theory. It uses Johansen's cointegration methodology to identify long-term relationships among assets. We compare results from optimized portfolios constructed from samples of country funds and iShares with portfolios from the same samples but not optimized. The optimized portfolios exhibit diversification potential while the nonoptimized portfolios do not.

A multivariate time series approach to projected life tables

AbstractThe method of mortality forecasting proposed by Lee and Carter describes a time series of age‐specific log‐death rates as a sum of an independent of time age‐specific component and a bilinear term in which one of the component is a time‐varying factor reflecting general change in mortality and the second one is an age‐specific parameter. Such a rigid model structure implies that on average the mortality improvements for different age groups should be proportional, regardless of the calendar period: a single time factor drives the future death rates. This paper investigates the use of multivariate time series techniques for forecasting age‐specific death rates. This approach allows for relative speed of decline in the log death rates specific to the different ages. The dynamic factor analysis and the Johansen cointegration methodology are successfully applied to project mortality. The inclusion of several time factors allows the model to capture the imperfect correlations in death rates from 1 year to the next. The benchmark Lee–Carter model appears as a special case of these approaches. An empirical study is conducted with the help of the Johansen cointegration methodology. A vector‐error correction model is fitted to Belgian general population death rates. A comparison is performed with the forecast of life expectancies obtained from the classical Lee–Carter model. Copyright © 2009 John Wiley &amp; Sons, Ltd.

The Demand for Money in Sierra Leone Revisited

AbstractThis paper uses Johansen's cointegration methodology to estimate Sierra Leone's money long run demand function for the 1964-2005 period. It finds a stable long-run relationship between the quantity of real money balances and its determinants. Secondly, all the estimated coefficients have their expected signs. Additionally, as expected in economies with under-developed financial systems, Sierra Leone's long-run money demand function is unit income-elastic and interest-rate inelastic. Thus, the study provides support for the neoclassical money demand specification. Additionally, it reaffirms the central findings of Kallon (1992).

Testing the purchasing power parity: evidence from the new EU countries

This article examines the validity of the purchasing power parity (PPP) between each of the 12 new EU countries vis-à-vis the Eurozone. Using the Johansen cointegration methodology for a period that begins from the mid-1990s and allowing for a structural break for the countries that joined the EU on May 2004, it is found that there is a long-run equilibrium relationship among the nominal exchange rate, the domestic prices and the foreign prices, for all the new EU countries. The evidence also suggests that the PPP vector enters the cointegration space for Bulgaria, Cyprus, Romania and Slovenia, which means that only for these countries the long-run PPP vis-à-vis the Eurozone is verified. For the rest of the new EU countries the long-run PPP is violated, may due to the fact that the currencies of these countries have been pegged to the euro and cannot reflect the inflation differences vis-à-vis the Eurozone.

Long and Short-Run Capital Structure Dynamics in the UK - An Industry Level Study

Despite significant theoretical and empirical developments in the capital structure literature, the trade-off theory and the related question of the optimality of the gearing ratio remain the subject of intense debate. The pecking order theory emerged to directly contrast with the implications of the trade-off theory. This paper investigates whether industry-optimal gearing ratio targeting behavior arises in the long run while a hierarchy of financing (or pecking order) arises in the short run. The relationship between components of common corporate gearing ratios is investigated using a Johansen co-integration methodology. Evidence of target adjustment is found, though only with respect to certain gearing ratios. Further, adjustment speed coefficients of the error correction representation imply that UK firms close the majority of any deviation from the target with retained earnings rather than external financing. However, while firms in mature industries appear to close the second largest part of any deviation with debt, firms in younger industries appear to close the second largest part of any deviation with equity. A general version of the pecking order theory can reconcile these results.

Purchasing Power Parity in economies in transition: evidence from Central and East European countries

The present study tests for the validity of long-run Purchasing Power Parity (PPP) for 17 European economies in transition. Analysis is performed following the methodological suggestions expressed in recent studies for PPP. Long-run PPP is initially tested for each economy vis-a-vis the USA, using the Johansen cointegration methodology and then for the whole set of countries using the Larsson et al. (2001) panel cointegration technique. The analysis provides support for long-run equilibria, but the coefficients of the estimated cointegrating vectors violate the symmetry and proportionality hypotheses suggested by PPP. We provide some arguments for these findings, based on the existing literature on transition and foreign exchange markets.