How does one practically implement a Vector Autoregression (VAR)?
Posted: Sat Jun 02, 2018 8:10 am
Dear EViews-Forum,
First: Thank you for the time and effort for answering this question. It is much appreciated!
I am currently writing my Master Thesis and analyze the relationship of the return of a specific group of stocks and some macroeconomic variables An example could be: How does the level of short-term interest rates affect the return of stock X ?
In the end, I would like to have a single equation which describes the return of stock X and its dependencies on the macroeconomic variables. If you would use an OLS Analysis, for example, you would get such an equation:
y = 0,5 + 1,8 * x + 0,9 * z + 14 * v
with
x = short-term interest rate
x = inflation rate
v = GDP growth rate
In my opinion, however, a Vector Autoregression is a better fit as it incorporates dependencies among the macroeconomic variables.
When I choose "Estimate VAR" in EViews, I choose the stock as the endogenous variable (in the following example it is the Index MSCI World) and the macroeconomic variables as the exogenous variables (in this case inflation rate and short-term interest rate). The results are as follows:
I did some research about VAR and know that it is usually provided in the format of a matrix. Unfortunately, I have problems to connect the values I receive from EViews and the standard formula:
How would the above formula look like if I incorporate the results from the first picture? What are the values for a(1,1), a(1,2) or a(2,1) and y(1) etc?
If the current macroeconomic variables are available, in the case of the OLS, I can simply insert the values for x, z and v to receive the value for y.
How does it work with an Vector Autoregression? Which part of the formula contains the macroeconomic variables (x, z and v respectively).Would I even receive one value or is the result a matrix? What would the matrix tell me?
Again, I really appreciate your time and knowledge! Thank you already for every answer!
Best regards,
Anni
First: Thank you for the time and effort for answering this question. It is much appreciated!
I am currently writing my Master Thesis and analyze the relationship of the return of a specific group of stocks and some macroeconomic variables An example could be: How does the level of short-term interest rates affect the return of stock X ?
In the end, I would like to have a single equation which describes the return of stock X and its dependencies on the macroeconomic variables. If you would use an OLS Analysis, for example, you would get such an equation:
y = 0,5 + 1,8 * x + 0,9 * z + 14 * v
with
x = short-term interest rate
x = inflation rate
v = GDP growth rate
In my opinion, however, a Vector Autoregression is a better fit as it incorporates dependencies among the macroeconomic variables.
When I choose "Estimate VAR" in EViews, I choose the stock as the endogenous variable (in the following example it is the Index MSCI World) and the macroeconomic variables as the exogenous variables (in this case inflation rate and short-term interest rate). The results are as follows:
I did some research about VAR and know that it is usually provided in the format of a matrix. Unfortunately, I have problems to connect the values I receive from EViews and the standard formula:
How would the above formula look like if I incorporate the results from the first picture? What are the values for a(1,1), a(1,2) or a(2,1) and y(1) etc?
If the current macroeconomic variables are available, in the case of the OLS, I can simply insert the values for x, z and v to receive the value for y.
How does it work with an Vector Autoregression? Which part of the formula contains the macroeconomic variables (x, z and v respectively).Would I even receive one value or is the result a matrix? What would the matrix tell me?
Again, I really appreciate your time and knowledge! Thank you already for every answer!
Best regards,
Anni