Presentation On ARDL

Presented to Prof. Dr. Zahid Ahmed

Presented By
Ambreen Khursheed
Sumaira Naz

ARDL
Auto-Regressive Distributed Lag

What is ARDL?
A technique used to test co-integration for I(0) &
I(1) variables.

Who introduced this model?

Pesaran et al. introduced it in 2001

The combination of AR &

DL

AR (Auto-regressive)
In AR the future values are estimated based
on a weighted sum of past values.
DL (distributed lag)
A dynamic model in which the effect of a
regressor X on Y occurs over time rather
than all at once.

Types of Lag
Autoregressive refers to lags in the
dependent variable
Distributed lag refers to lags of the
explanatory variables

Difference between ARDL ,VAR

and VECM

ARDL Model
An Autoregressive Distributed lag model
refers to a model with lags of both the
dependent and explanatory variables.
It involves a single equation set up,
making it simple to implement and
interpret.

yt 0 1 xt 2 xt 1 ut

VAR- vector auto-regression

(VAR) is an econometric model used to capture the evolution and the
interdependencies between multiple time series, generalizing the univariate AR
Models.
The (VAR) model is one of the most successful, exible, and easy to use models
for the analysis of multivariate time series.
In addition to data description and forecasting, the VAR model is also used for
structural inference and policy analysis.

VAR-Vector Auto-regression
Following Pesaran et al. (2001), we assemble (VAR) of order p, denoted
VAR (p), for the following growth function
p

Z t i z t i t
i 1

Where Zt is the vector of both Xt and Yt

where Yt is dependent variable defined as GDP in our example.
Xt is the vector matrix which represents a set of explanatory variables i.e
short term debt and household debt.

VECM-Vector Error Correction

Model
Vector Error Correction Models (VECM) are the basic VAR, with an
error correction term incorporated into the model and bivariate &
multivariate cointegration implies an appropriate VECM.
The reason for the error correction term is the same as with the
standard error correction model
it measures any movement away from the long-run equilibrium.
It also checks that the dependent variable is I(1).

Vector error correction model

(VECM)
Vector error correction model (VECM) is developed as follows:
The VECM procedure is imperative in the testing of at most one
co-integrating vector between dependent variable Yt and a set of
regressors Xt.
p i

p 1

i 1

i 1

z t t zt 1 t yt i t xt i t

Why ARDL model is used?

ARDL model helps in cointegration analysis which
provides a framework for estimation, inference, and
interpretation of variables that are integrated with
different orders of stationarity.

Procedures to carry out the ARDL

approach to cointegration technique
It includes the determination of the long run
relationships among the variables used in
the models
And the estimation of the coefficients of the
long and short run relationships.

Significance of ARDL
ARDL models yield consistent estimates of the long
run coefficients .
The bounds test allows a mixture of I(1) and I(0)
variables as regressor .And the order of integration of
appropriate variables may not necessarily be the
same.
This technique generally provides unbiased estimates
of the long run model and valid t-statistics .
This technique is also suitable for small or finite
sample size.

What is meant by the Estimation

of ARDL model?
To estimate the ARDL model is to test for the
presence of long run relationships among the
variables by using the Bounds F-Test.

Estimation of ARDL model

Step 1
The dependent variable must be nonstationary in order for the model to behave
better.

What are I(0),I(1) variables?

Stationarity check of Variables in ARDL
I(0)= Difference (d) at zero level or we can say that covariancestationary processes are I(0).
I(1) =First-difference stationary processes are also known as
integrated processes of order 1, or I(1) processes
In general, a process whose (d) ,the difference is stationary is an
integrated process of order d, or I(d).

Step 2
None of the variables should be I(2).

We can use ADF test to check that none of

the series we are working with are I(2).
Because we cant proceed with I(2)
variables as it hinders the ARDL process to
be carried out.

Step 3
Serial independence of errors
Make sue the errors of the model are serially
independent
By using Breusch test in E-views can be used to
test the null hypothesis that the errors are serially
independent.

Sumaira Naz

Step 4
Use of Correct Functional Form in
ARDL
It is important to include all the relevant variables in
the model, if we exclude an important explanatory
variable, the regression has omitted variable bias.
So estimates will be unreliable and the t and F
statistics can not be relied on.
Similarly if we include variables that are not
relevant.Then this can reduce the efficiency of the
regression.

Step 5
Dynamic Stability of the model
Make sure the model is dynamically stable
One of the most important considerations with
financial data is that we need to model the
dynamics appropriately, with the most
appropriate lag structure.

Example Used in ARDL Model

The cointegration of our data
is to be checked in Microfit-5
using ARDL approach for
following variables.
Dependent Variable-GDP
Independent VariableHousehold debt & Short Term
debt

Hypothesis
Null hypothesis
H0:Cointegration does not exists in long-term relationship between the
variables GDP and debt
Alternative Hypothesis
H1: Cointegration exists in long-term relationship between the variables
GDP and debt

ARDL /Bounds Test Interpretation

For the interpretation of ARDL following statistics are considered: Probability value of the variables (dependent and Independent)
F-statistic
if its value lies higher than the upper bound then it can be concluded that
cointegration exists between set of variables. Thus null hypothesis is
rejected.
In case if the value lies between the bounds then your test is inconclusive.
But if it lies lower then the lower bound then variables are not
cointegrated.

ARDL /Bounds Test

Interpretation
Check the Durbin Watson Statistic as it is a number that tests
for autocorrelation in the residuals from a statistical regression analyses.
Check the ECM value in the table .As this value should be negative and
significant. If it is between 0 and -1 then it will be ideal.
Check the R-square value for determining how good fit the model is.
Residual Sum of squares is used if we want to check the performance of
our model by comparing with some other ARDL model having same
dependent variable.

ARDL-Check Long & Short run

causality
Long-run causality can be revealed through the significance of
the lagged ECMs by t test
While F-statistic or Wald test investigate short-run causality
through the significance of joint test with an application of sum
of lags of explanatory variables in the model.

Algorithm
Import data (excel file) in Microfit 5
From Univariate option, select ARDL approach to
cointegration
Enter Variables
Select the Technique & criteria
Get the results