Lecture 5: VAR and VEC Models

This is Lecture 5 in my Econometrics course at Swansea University. Watch Live on The Economic Society Facebook page Every Monday 2:00 pm (UK time) October 2nd - December 2017.

In this lecture, I explain how to estimate a vector autoregressive model. We started with explaining the Autoregressive Process to explain the behaviour of a time series and how to present such process in different forms. Then we explained the basic conditions required to estimate a VAR model. The data need to be stationary. You need to choose the optimal lag length. The model must be stable. After estimation, we could test for causality among variables using Granger causality tests. Because VAR models are often difficult to interpret, we can use the impulse responses and variance
decompositions. The impulse responses trace out the responsiveness of the dependent variables in the VAR to shocks to the error term. A unit shock is applied to each variable and its effects are noted. Variance Decomposition offers a slightly different method of examining VAR dynamics. They give the proportion of the movements in the dependent variables that are due to their ‘own’ shocks, versus shocks to the other variables. It gives information about the relative importance of each shock to the variables in the VAR.

We also covered the concept of co-integration, and how to test for cointegration. Then we discussed the Error Correction Model and Vector Error Correction Model VECM.

[Antiyoukai]

15:38 Choosing Lag Length
21:44 Reading VAR result
27:05 Granger Causality
35:41 Impulse
36:17 Variance Decomposition
38:19 Advantages of VAR Model
40:00 Problems with VAR
51:18 Why Stationarity Matters
1:09:08 Unit Root and Cointegration Tests
1:11:12 Engel-Granger Test
1:15:57 Granger Representation
1:20:56 VECM Johansen

[timothyquek]

this is the best explanation of VAR/VEC on youtube. Thanks

[ke_]

You explained in a very simple and objective manner a very difficult subject. Thank you for making this video!

[mariaionescu]

This is the best econometrics video I have ever seen in my life !! Thank you for the best teaching method !! You should keep posting things more often !! You are doing a very very good job !!

[allwanamar]

I like the way you teach . It shows clearly what we have to do in steps. Thank you many times. MSc economics student, univ. of edinburgh.

[alexy]

This is an excellent video! it takes some confusing topics and presents them all in a really straightforward and logical manner. Many thanks!

[eduardoduque]

Thank you for the class. You helped me a lot with this amazing explanation of a very difficult topic. I have read many books about the topic and now everything makes sense. I need to watch the video again, but I am pretty sure that, when finished, I will be ready to finish my last thesis chapter.


Thank you again. Thank you a lot.

[jerryho]

Excellent lecture with detailed and clear explanations!

[mdahsanulhimel]

THANK YOU is not enough to convey my gratitude to you.

[constantin]

This is actually my first comment on Youtube. I am currently writing my master's thesis in economics and have to learn VAR autodidactically - this is by far the best video I have found on YouTube in this context. Hands-on and simply brilliant!

Thank you very much & keep on teaching like this! Greetings from Germany!

[wowZhenek]

Thank you very much for this awesome lecture. Just a few questions:

1. 18:25 : What is "root of the matrix"? Eigenvalues? Also, what condition would I need to fulfil if I had a, say, VAR(3)?
2. 01:06:00 When you discussed ECM and argued about usability of the OLS, it was probably wise to mention, that the integrating factor is also I(0).
3. What about VECM models with more than 2 variables and higher dimensions (like, 3+ lags)? I guess we can get more than one integrating factor then? What about condition on the pi-matrix? Will there be just 1 pi-matrix or more than 1?

[family_bb]

Thank you so much for teaching this all in one topic. It made me understand it better. MSc Business (Finance Concentration) Canada

[solution-]

thank you, sir... you have a nice way of explaining each and everything in a topic .this is the very first lecture on youtube from which I learn the VAR method, you explained this topic in a very easy way and this lecture will help me in my research work. thanks again.
M.phil Student
university of Peshawar, Pakistan

[lukasjursa]

Thank you so much for great explanation of VAR models. Best econometric video on YouTube.

[alexleebenbaum]

It is really enlighting after watching your video, thanks a lot!

[faisalahmad]

You made it very easy to grasp the difficult concepts.Amazing job

[taimiamunkete]

Thank you so much for this wonderful lecture. I was really helpful in understanding VAR for the purpose of my thesis. I am currently doing a panel VAR analysis for 6 countries and have 6 variables. The problem I am experiencing is that, although all my variables are stationary at I(0) (using ADF, PP, LLC and IPS unit root tests), when I do the AR Roots test graph and table (using eviews 10) I find that my VAR is not stable regardless of the number of lags I use. What could be the problem and how can I fix it? I would like to interpret my Impulse Response Functions and Variance Decomposition. I would greatly appreciate your assistance. Thanks you.

[betulbalaban]

It is a very useful lecture, thank you for sharing this video.

[ishikahalder]

well curated.Thank u so much for the video😍

[constantinosrousos]

Thanks for the video, very crisp and precise. Keep up the good work, very helpful indeed.