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This page intentionally left blank
Introductory Econometrics for Finance
SECOND EDITION

This best-selling textbook addresses the need for an introduction to

econometrics specifically written for finance students. It includes
examples and case studies which finance students will recognise and
relate to. This new edition builds on the successful data- and
problem-driven approach of the first edition, giving students the skills to
estimate and interpret models while developing an intuitive grasp of
underlying theoretical concepts.

Key features:
● Thoroughly revised and updated, including two new chapters on
panel data and limited dependent variable models
● Problem-solving approach assumes no prior knowledge of
econometrics emphasising intuition rather than formulae, giving
students the skills and confidence to estimate and interpret models
● Detailed examples and case studies from finance show students how
techniques are applied in real research
● Sample instructions and output from the popular computer package
EViews enable students to implement models themselves and
understand how to interpret results
● Gives advice on planning and executing a project in empirical finance,
preparing students for using econometrics in practice
● Covers important modern topics such as time-series forecasting,
volatility modelling, switching models and simulation methods
● Thoroughly class-tested in leading finance schools

Chris Brooks is Professor of Finance at the ICMA Centre, University of

Reading, UK, where he also obtained his PhD. He has published over
sixty articles in leading academic and practitioner journals including
the Journal of Business, the Journal of Banking and Finance, the Journal of
Empirical Finance, the Review of Economics and Statistics and the Economic
Journal. He is an associate editor of a number of journals including the
International Journal of Forecasting. He has also acted as consultant for
various banks and professional bodies in the fields of finance,
econometrics and real estate.
Introductory Econometrics
for Finance
SECOND EDITION

Chris Brooks
The ICMA Centre, University of Reading
CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press

The Edinburgh Building, Cambridge CB2 8RU, UK
Published in the United States of America by Cambridge University Press, New York
www.cambridge.org
Information on this title: www.cambridge.org/9780521873062

© Chris Brooks 2008

This publication is in copyright. Subject to statutory exception and to the provision of

relevant collective licensing agreements, no reproduction of any part may take place
without the written permission of Cambridge University Press.
First published in print format 2008

ISBN-13 978-0-511-39848-3 eBook (EBL)

ISBN-13 978-0-521-87306-2 hardback

ISBN-13 978-0-521-69468-1 paperback

Cambridge University Press has no responsibility for the persistence or accuracy of urls
for external or third-party internet websites referred to in this publication, and does not
guarantee that any content on such websites is, or will remain, accurate or appropriate.
 Contents

List of figures page xii

List of tables xiv
List of boxes xvi
List of screenshots xvii
Preface to the second edition xix
Acknowledgements xxiv

1 Introduction 1
1.1 What is econometrics? 1
1.2 Is financial econometrics different from ‘economic econometrics’? 2
1.3 Types of data 3
1.4 Returns in financial modelling 7
1.5 Steps involved in formulating an econometric model 9
1.6 Points to consider when reading articles in empirical finance 10
1.7 Econometric packages for modelling financial data 11
1.8 Outline of the remainder of this book 22
1.9 Further reading 25
Appendix: Econometric software package suppliers 26

2 A brief overview of the classical linear regression model 27

2.1 What is a regression model? 27
2.2 Regression versus correlation 28
2.3 Simple regression 28
2.4 Some further terminology 37
2.5 Simple linear regression in EViews -- estimation of an optimal
hedge ratio 40
2.6 The assumptions underlying the classical linear regression model 43
2.7 Properties of the OLS estimator 44
2.8 Precision and standard errors 46
2.9 An introduction to statistical inference 51

v
vi Contents

2.10 A special type of hypothesis test: the t-ratio 65

2.11 An example of the use of a simple t-test to test a theory in finance:
can US mutual funds beat the market? 67
2.12 Can UK unit trust managers beat the market? 69
2.13 The overreaction hypothesis and the UK stock market 71
2.14 The exact significance level 74
2.15 Hypothesis testing in EViews -- example 1: hedging revisited 75
2.16 Estimation and hypothesis testing in EViews -- example 2:
the CAPM 77
Appendix: Mathematical derivations of CLRM results 81

3 Further development and analysis of the classical linear

regression model 88
3.1 Generalising the simple model to multiple linear regression 88
3.2 The constant term 89
3.3 How are the parameters (the elements of the β vector) calculated
in the generalised case? 91
3.4 Testing multiple hypotheses: the F-test 93
3.5 Sample EViews output for multiple hypothesis tests 99
3.6 Multiple regression in EViews using an APT-style model 99
3.7 Data mining and the true size of the test 105
3.8 Goodness of fit statistics 106
3.9 Hedonic pricing models 112
3.10 Tests of non-nested hypotheses 115
Appendix 3.1: Mathematical derivations of CLRM results 117
Appendix 3.2: A brief introduction to factor models and principal
components analysis 120

4 Classical linear regression model assumptions and

diagnostic tests 129
4.1 Introduction 129
4.2 Statistical distributions for diagnostic tests 130
4.3 Assumption 1: E(u t ) = 0 131
4.4 Assumption 2: var(u t ) = σ 2 < ∞ 132
4.5 Assumption 3: cov(u i , u j ) = 0 for i = j 139
4.6 Assumption 4: the xt are non-stochastic 160
4.7 Assumption 5: the disturbances are normally distributed 161
4.8 Multicollinearity 170
4.9 Adopting the wrong functional form 174
4.10 Omission of an important variable 178
4.11 Inclusion of an irrelevant variable 179
 Contents vii

4.12 Parameter stability tests 180

4.13 A strategy for constructing econometric models and a discussion
of model-building philosophies 191
4.14 Determinants of sovereign credit ratings 194

5 Univariate time series modelling and forecasting 206

5.1 Introduction 206
5.2 Some notation and concepts 207
5.3 Moving average processes 211
5.4 Autoregressive processes 215
5.5 The partial autocorrelation function 222
5.6 ARMA processes 223
5.7 Building ARMA models: the Box--Jenkins approach 230
5.8 Constructing ARMA models in EViews 234
5.9 Examples of time series modelling in finance 239
5.10 Exponential smoothing 241
5.11 Forecasting in econometrics 243
5.12 Forecasting using ARMA models in EViews 256
5.13 Estimating exponential smoothing models using EViews 258

6 Multivariate models 265

6.1 Motivations 265
6.2 Simultaneous equations bias 268
6.3 So how can simultaneous equations models be validly estimated? 269
6.4 Can the original coefficients be retrieved from the π s? 269
6.5 Simultaneous equations in finance 272
6.6 A definition of exogeneity 273
6.7 Triangular systems 275
6.8 Estimation procedures for simultaneous equations systems 276
6.9 An application of a simultaneous equations approach to
modelling bid--ask spreads and trading activity 279
6.10 Simultaneous equations modelling using EViews 285
6.11 Vector autoregressive models 290
6.12 Does the VAR include contemporaneous terms? 295
6.13 Block significance and causality tests 297
6.14 VARs with exogenous variables 298
6.15 Impulse responses and variance decompositions 298
6.16 VAR model example: the interaction between property returns and
the macroeconomy 302
6.17 VAR estimation in EViews 308
viii Contents

7 Modelling long-run relationships in finance 318

7.1 Stationarity and unit root testing 318
7.2 Testing for unit roots in EViews 331
7.3 Cointegration 335
7.4 Equilibrium correction or error correction models 337
7.5 Testing for cointegration in regression: a residuals-based approach 339
7.6 Methods of parameter estimation in cointegrated systems 341
7.7 Lead--lag and long-term relationships between spot and
futures markets 343
7.8 Testing for and estimating cointegrating systems using the
Johansen technique based on VARs 350
7.9 Purchasing power parity 355
7.10 Cointegration between international bond markets 357
7.11 Testing the expectations hypothesis of the term structure of
interest rates 362
7.12 Testing for cointegration and modelling cointegrated systems
using EViews 365

8 Modelling volatility and correlation 379

8.1 Motivations: an excursion into non-linearity land 379
8.2 Models for volatility 383
8.3 Historical volatility 383
8.4 Implied volatility models 384
8.5 Exponentially weighted moving average models 384
8.6 Autoregressive volatility models 385
8.7 Autoregressive conditionally heteroscedastic (ARCH) models 386
8.8 Generalised ARCH (GARCH) models 392
8.9 Estimation of ARCH/GARCH models 394
8.10 Extensions to the basic GARCH model 404
8.11 Asymmetric GARCH models 404
8.12 The GJR model 405
8.13 The EGARCH model 406
8.14 GJR and EGARCH in EViews 406
8.15 Tests for asymmetries in volatility 408
8.16 GARCH-in-mean 409
8.17 Uses of GARCH-type models including volatility forecasting 411
8.18 Testing non-linear restrictions or testing hypotheses about
non-linear models 417
8.19 Volatility forecasting: some examples and results from the
literature 420
8.20 Stochastic volatility models revisited 427
 Contents ix

8.21 Forecasting covariances and correlations 428

8.22 Covariance modelling and forecasting in finance: some examples 429
8.23 Historical covariance and correlation 431
8.24 Implied covariance models 431
8.25 Exponentially weighted moving average model for covariances 432
8.26 Multivariate GARCH models 432
8.27 A multivariate GARCH model for the CAPM with time-varying
covariances 436
8.28 Estimating a time-varying hedge ratio for FTSE stock index returns 437
8.29 Estimating multivariate GARCH models using EViews 441
Appendix: Parameter estimation using maximum likelihood 444

9 Switching models 451

9.1 Motivations 451
9.2 Seasonalities in financial markets: introduction and
literature review 454
9.3 Modelling seasonality in financial data 455
9.4 Estimating simple piecewise linear functions 462
9.5 Markov switching models 464
9.6 A Markov switching model for the real exchange rate 466
9.7 A Markov switching model for the gilt--equity yield ratio 469
9.8 Threshold autoregressive models 473
9.9 Estimation of threshold autoregressive models 474
9.10 Specification tests in the context of Markov switching and
threshold autoregressive models: a cautionary note 476
9.11 A SETAR model for the French franc--German mark exchange rate 477
9.12 Threshold models and the dynamics of the FTSE 100 index and
index futures markets 480
9.13 A note on regime switching models and forecasting accuracy 484

10 Panel data 487

10.1 Introduction -- what are panel techniques and why are they used? 487
10.2 What panel techniques are available? 489
10.3 The fixed effects model 490
10.4 Time-fixed effects models 493
10.5 Investigating banking competition using a fixed effects model 494
10.6 The random effects model 498
10.7 Panel data application to credit stability of banks in Central and
Eastern Europe 499
10.8 Panel data with EViews 502
10.9 Further reading 509
x Contents

11 Limited dependent variable models 511

11.1 Introduction and motivation 511
11.2 The linear probability model 512
11.3 The logit model 514
11.4 Using a logit to test the pecking order hypothesis 515
11.5 The probit model 517
11.6 Choosing between the logit and probit models 518
11.7 Estimation of limited dependent variable models 518
11.8 Goodness of fit measures for linear dependent variable models 519
11.9 Multinomial linear dependent variables 521
11.10 The pecking order hypothesis revisited -- the choice between
financing methods 525
11.11 Ordered response linear dependent variables models 527
11.12 Are unsolicited credit ratings biased downwards? An ordered
probit analysis 528
11.13 Censored and truncated dependent variables 533
11.14 Limited dependent variable models in EViews 537
Appendix: The maximum likelihood estimator for logit and
probit models 544

12 Simulation methods 546

12.1 Motivations 546
12.2 Monte Carlo simulations 547
12.3 Variance reduction techniques 549
12.4 Bootstrapping 553
12.5 Random number generation 557
12.6 Disadvantages of the simulation approach to econometric or
financial problem solving 558
12.7 An example of Monte Carlo simulation in econometrics: deriving a
set of critical values for a Dickey--Fuller test 559
12.8 An example of how to simulate the price of a financial option 565
12.9 An example of bootstrapping to calculate capital risk requirements 571

13 Conducting empirical research or doing a project or dissertation

in finance 585
13.1 What is an empirical research project and what is it for? 585
13.2 Selecting the topic 586
13.3 Sponsored or independent research? 590
13.4 The research proposal 590
13.5 Working papers and literature on the internet 591
13.6 Getting the data 591
 Contents xi

13.7 Choice of computer software 593

13.8 How might the finished project look? 593
13.9 Presentational issues 597

14 Recent and future developments in the modelling

of financial time series 598
14.1 Summary of the book 598
14.2 What was not covered in the book 598
14.3 Financial econometrics: the future? 602
14.4 The final word 606

Appendix 1 A review of some fundamental mathematical and

statistical concepts 607
A1 Introduction 607
A2 Characteristics of probability distributions 607
A3 Properties of logarithms 608
A4 Differential calculus 609
A5 Matrices 611
A6 The eigenvalues of a matrix 614

Appendix 2 Tables of statistical distributions 616

Appendix 3 Sources of data used in this book 628

References 629
Index 641
 Figures

1.1 Steps involved in forming an 2.17 Frequency distribution of t-ratios of

econometric model page 9 mutual fund alphas (gross of
2.1 Scatter plot of two variables, y and x 29 transactions costs) Source: Jensen
2.2 Scatter plot of two variables with a line (1968). Reprinted with the permission
of best fit chosen by eye 31 of Blackwell Publishers 68
2.3 Method of OLS fitting a line to the data 2.18 Frequency distribution of t-ratios of
by minimising the sum of squared mutual fund alphas (net of
residuals 32 transactions costs) Source: Jensen
2.4 Plot of a single observation, together (1968). Reprinted with the permission
with the line of best fit, the residual of Blackwell Publishers 68
and the fitted value 32 2.19 Performance of UK unit trusts,
2.5 Scatter plot of excess returns on fund 1979--2000 70
XXX versus excess returns on the 3.1 R 2 = 0 demonstrated by a flat
market portfolio 35 estimated line, i.e. a zero slope
2.6 No observations close to the y-axis 36 coefficient 109
2.7 Effect on the standard errors of the 3.2 R 2 = 1 when all data points lie exactly
coefficient estimates when (xt − x̄) are on the estimated line 109
narrowly dispersed 48 4.1 Effect of no intercept on a regression
2.8 Effect on the standard errors of the line 131
coefficient estimates when (xt − x̄) are 4.2 Graphical illustration of
widely dispersed 49 heteroscedasticity 132
2.9 Effect on the standard errors of xt2 large 49 4.3 Plot of û t against û t−1 , showing positive
2.10 Effect on the standard errors of xt2 small 50 autocorrelation 141
2.11 The normal distribution 54 4.4 Plot of û t over time, showing positive
2.12 The t-distribution versus the normal 55 autocorrelation 142
2.13 Rejection regions for a two-sided 5% 4.5 Plot of û t against û t−1 , showing
hypothesis test 57 negative autocorrelation 142
2.14 Rejection regions for a one-sided 4.6 Plot of û t over time, showing negative
hypothesis test of the form H0 : β = β ∗ , autocorrelation 143
H1 : β < β ∗ 57 4.7 Plot of û t against û t−1 , showing no
2.15 Rejection regions for a one-sided autocorrelation 143
hypothesis test of the form H0 : β = β ∗ , 4.8 Plot of û t over time, showing no
H1 : β > β ∗ 57 autocorrelation 144
2.16 Critical values and rejection regions for 4.9 Rejection and non-rejection regions for
a t20;5% 61 DW test 147

xii
 List of figures xiii

4.10 A normal versus a skewed distribution 162 7.2 Value of t-ratio of slope coefficient for
4.11 A leptokurtic versus a normal 1,000 sets of regressions of a
distribution 162 non-stationary variable on another
4.12 Regression residuals from stock return independent non-stationary variable 320
data, showing large outlier for October 7.3 Example of a white noise process 324
1987 165 7.4 Time series plot of a random walk
4.13 Possible effect of an outlier on OLS versus a random walk with drift 324
estimation 166 7.5 Time series plot of a deterministic
4.14 Plot of a variable showing suggestion trend process 325
for break date 185 7.6 Autoregressive processes with differing
5.1 Autocorrelation function for sample values of φ (0, 0.8, 1) 325
MA(2) process 215 8.1 Daily S&P returns for January
5.2 Sample autocorrelation and partial 1990--December 1999 387
autocorrelation functions for an MA(1) 8.2 The problem of local optima in
model: yt = −0.5u t−1 + u t 226 maximum likelihood estimation 397
5.3 Sample autocorrelation and partial 8.3 News impact curves for S&P500 returns
autocorrelation functions for an MA(2) using coefficients implied from GARCH
model: yt = 0.5u t−1 − 0.25u t−2 + u t 226 and GJR model estimates 410
5.4 Sample autocorrelation and partial 8.4 Three approaches to hypothesis testing
autocorrelation functions for a slowly under maximum likelihood 418
decaying AR(1) model: yt = 0.9yt−1 + u t 227 8.5 Source: Brooks, Henry and Persand
5.5 Sample autocorrelation and partial (2002). Time-varying hedge ratios
autocorrelation functions for a more derived from symmetric and
rapidly decaying AR(1) model: asymmetric BEKK models for FTSE
yt = 0.5yt−1 + u t 227 returns. 440
5.6 Sample autocorrelation and partial 9.1 Sample time series plot illustrating a
autocorrelation functions for a more regime shift 452
rapidly decaying AR(1) model with 9.2 Use of intercept dummy variables for
negative coefficient: yt = −0.5yt−1 + u t 228 quarterly data 456
5.7 Sample autocorrelation and partial 9.3 Use of slope dummy variables 459
autocorrelation functions for a 9.4 Piecewise linear model with
non-stationary model (i.e. a unit threshold x∗ 463
coefficient): yt = yt−1 + u t 228 9.5 Source: Brooks and Persand (2001b).
5.8 Sample autocorrelation and partial Unconditional distribution of
autocorrelation functions for an US GEYR together with a normal
ARMA(1, 1) model: distribution with the same mean and
yt = 0.5yt−1 + 0.5u t−1 + u t 229 variance 470
5.9 Use of an in-sample and an 9.6 Source: Brooks and Persand (2001b).
out-of-sample period for analysis 245 Value of GEYR and probability that
6.1 Impulse responses and standard error it is in the High GEYR regime for the
bands for innovations in unexpected UK 471
inflation equation errors 307 11.1 The fatal flaw of the linear probability
6.2 Impulse responses and standard error model 513
bands for innovations in the dividend 11.2 The logit model 515
yields 307 11.3 Modelling charitable donations as a
7.1 Value of R2 for 1,000 sets of regressions function of income 534
of a non-stationary variable on another 11.4 Fitted values from the failure probit
independent non-stationary variable 319 regression 542
 Tables

1.1 Econometric software packages for 5.1 Uncovered interest parity test results 241
modelling financial data page 12 5.2 Forecast error aggregation 252
2.1 Sample data on fund XXX to motivate 6.1 Call bid--ask spread and trading volume
OLS estimation 34 regression 283
2.2 Critical values from the standard 6.2 Put bid--ask spread and trading volume
normal versus t-distribution 55 regression 283
2.3 Classifying hypothesis testing errors 6.3 Granger causality tests and implied
and correct conclusions 64 restrictions on VAR models 297
2.4 Summary statistics for the estimated 6.4 Marginal significance levels associated
regression results for (2.52) 67 with joint F-tests 305
2.5 Summary statistics for unit trust 6.5 Variance decompositions for the
returns, January 1979--May 2000 69 property sector index residuals 306
2.6 CAPM regression results for unit trust 7.1 Critical values for DF tests (Fuller, 1976,
returns, January 1979--May 2000 70 p. 373) 328
2.7 Is there an overreaction effect in the 7.2 DF tests on log-prices and returns for
UK stock market? 73 high frequency FTSE data 344
2.8 Part of the EViews regression output 7.3 Estimated potentially cointegrating
revisited 75 equation and test for cointegration for
3.1 Hedonic model of rental values in high frequency FTSE data 345
Quebec City, 1990. Dependent variable: 7.4 Estimated error correction model for
Canadian dollars per month 114 high frequency FTSE data 346
3A.1 Principal component ordered 7.5 Comparison of out-of-sample
eigenvalues for Dutch interest rates, forecasting accuracy 346
1962--1970 123 7.6 Trading profitability of the error
3A.2 Factor loadings of the first and second correction model with cost of carry 348
principal components for Dutch 7.7 Cointegration tests of PPP with
interest rates, 1962--1970 123 European data 356
4.1 Constructing a series of lagged values 7.8 DF tests for international bond indices 357
and first differences 140 7.9 Cointegration tests for pairs of
4.2 Determinants and impacts of sovereign international bond indices 358
credit ratings 197 7.10 Johansen tests for cointegration
4.3 Do ratings add to public information? 199 between international bond yields 359
4.4 What determines reactions to ratings 7.11 Variance decompositions for VAR of
announcements? 201 international bond yields 360

xiv
 List of tables xv

7.12 Impulse responses for VAR of 10.2 Tests of competition in banking with
international bond yields 361 fixed effects panel models 497
7.13 Tests of the expectations hypothesis 10.3 Results of random effects panel
using the US zero coupon yield curve regression for credit stability of Central
with monthly data 364 and East European banks 503
8.1 GARCH versus implied volatility 423 11.1 Logit estimation of the probability of
8.2 EGARCH versus implied volatility 423 external financing 517
8.3 Out-of-sample predictive power for 11.2 Multinomial logit estimation of the
weekly volatility forecasts 426 type of external financing 527
8.4 Comparisons of the relative 11.3 Ordered probit model results for the
information content of out-of-sample determinants of credit ratings 531
volatility forecasts 426 11.4 Two-step ordered probit model
8.5 Hedging effectiveness: summary allowing for selectivity bias in the
statistics for portfolio returns 439 determinants of credit ratings 532
9.1 Values and significances of days of the 11.5 Marginal effects for logit and
week coefficients 458 probit models for probability of MSc
9.2 Day-of-the-week effects with the failure 543
inclusion of interactive dummy 12.1 EGARCH estimates for currency futures
variables with the risk proxy 461 returns 574
9.3 Estimates of the Markov switching 12.2 Autoregressive volatility estimates for
model for real exchange rates 468 currency futures returns 575
9.4 Estimated parameters for the Markov 12.3 Minimum capital risk requirements for
switching models 470 currency futures as a percentage of the
9.5 SETAR model for FRF--DEM 478 initial value of the position 578
9.6 FRF--DEM forecast accuracies 479 13.1 Journals in finance and
9.7 Linear AR(3) model for the basis 482 econometrics 589
9.8 A two-threshold SETAR model for the 13.2 Useful internet sites for financial
basis 483 literature 592
10.1 Tests of banking market equilibrium 13.3 Suggested structure for a typical
with fixed effects panel models 496 dissertation or project 594
 Boxes

1.1 The value of econometrics page 2 4.6 Observations for the dummy variable 165
1.2 Time series data 4 4.7 Conducting a Chow test 180
1.3 Log returns 8 5.1 The stationarity condition for an AR( p)
1.4 Points to consider when reading a model 216
published paper 11 5.2 The invertibility condition for an MA(2)
1.5 Features of EViews 21 model 224
2.1 Names for y and xs in regression 5.3 Naive forecasting methods 247
models 28 6.1 Determining whether an equation is
2.2 Reasons for the inclusion of the identified 270
disturbance term 30 6.2 Conducting a Hausman test for
2.3 Assumptions concerning disturbance exogeneity 274
terms and their interpretation 44 6.3 Forecasting with VARs 299
2.4 Standard error estimators 48 7.1 Stationarity tests 331
2.5 Conducting a test of significance 56 7.2 Multiple cointegrating relationships 340
2.6 Carrying out a hypothesis test using 8.1 Testing for ‘ARCH effects’ 390
confidence intervals 60 8.2 Estimating an ARCH or GARCH model 395
2.7 The test of significance and confidence 8.3 Using maximum likelihood estimation
interval approaches compared 61 in practice 398
2.8 Type I and type II errors 64 9.1 How do dummy variables work? 456
2.9 Reasons for stock market overreactions 71 10.1 Fixed or random effects? 500
2.10 Ranking stocks and forming portfolios 72 11.1 Parameter interpretation for probit and
2.11 Portfolio monitoring 72 logit models 519
3.1 The relationship between the 11.2 The differences between censored and
regression F-statistic and R 2 111 truncated dependent variables 535
3.2 Selecting between models 117 12.1 Conducting a Monte Carlo simulation 548
4.1 Conducting White’s test 134 12.2 Re-sampling the data 555
4.2 ‘Solutions’ for heteroscedasticity 138 12.3 Re-sampling from the residuals 556
4.3 Conditions for DW to be a valid 12.4 Setting up a Monte Carlo simulation 560
test 148 12.5 Simulating the price of an Asian option 565
4.4 Conducting a Breusch--Godfrey test 149 12.6 Generating draws from a GARCH
4.5 The Cochrane--Orcutt procedure 151 process 566

xvi
 Screenshots

1.1 Creating a workfile page 15 5.4 Estimating exponential smoothing

1.2 Importing Excel data into the workfile 16 models 259
1.3 The workfile containing loaded data 17 6.1 Estimating the inflation equation 288
1.4 Summary statistics for a series 19 6.2 Estimating the rsandp equation 289
1.5 A line graph 20 6.3 VAR inputs screen 310
2.1 Summary statistics for spot and futures 41 6.4 Constructing the VAR impulse
2.2 Equation estimation window 42 responses 313
2.3 Estimation results 43 6.5 Combined impulse response graphs 314
2.4 Plot of two series 79 6.6 Variance decomposition graphs 315
3.1 Stepwise procedure equation 7.1 Options menu for unit root tests 332
estimation window 103 7.2 Actual, Fitted and Residual plot to
3.2 Conducting PCA in EViews 126 check for stationarity 366
4.1 Regression options window 139 7.3 Johansen cointegration test 368
4.2 Non-normality test results 164 7.4 VAR specification for Johansen tests 374
4.3 Regression residuals, actual values and 8.1 Estimating a GARCH-type model 400
fitted series 168 8.2 GARCH model estimation options 401
4.4 Chow test for parameter stability 188 8.3 Forecasting from GARCH models 415
4.5 Plotting recursive coefficient estimates 190 8.4 Dynamic forecasts of the conditional
4.6 CUSUM test graph 191 variance 415
5.1 Estimating the correlogram 235 8.5 Static forecasts of the conditional
5.2 Plot and summary statistics for the variance 416
dynamic forecasts for the percentage 8.6 Making a system 441
changes in house prices using an 10.1 Workfile structure window 505
AR(2) 257 11.1 ‘Equation Estimation’ window for
5.3 Plot and summary statistics for the limited dependent variables 539
static forecasts for the percentage 11.2 ‘Equation Estimation’ options for
changes in house prices using an limited dependent variables 541
AR(2) 258 12.1 Running an EViews program 561

xvii
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