Panel Cointegration Test - Capital Volatility, Financial Deepening and Capital Market Performan

Chapter 5 Capital Volatility, Financial Deepening and Capital Market Performance: …

5.3 Panel Cointegration Test

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7 -24731.67 1821.869 2.86e+21 100.9684 103.1598 101.8287 8 -16421.98 14974.24* 8.69e+21 67.53930 70.03656* 68.51964*

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5%

level)

FPE: Final prediction error

AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion

Source: Author’s computation from output result from the regression analysis

Table 5.3 above shows the results of the vector error correction model of lag length to be selected for this study. From the results, the vector error correction model of a lag order of eight (8) is discovered using the LR, SBIC and HQC while the vector error correction model of a lag order of two (2) is discovered using the FPE and AIC. All these information criteria are statistically significant at 5% level. However, to reach a decision, the smallest lag order as revealed by FPE and AIC was selected for this study. The implication is that the null hypothesis that there is no autocorrelation is accepted at lag length two. Therefore, the VECM estimates are not affected by the problem of serial correlation; hence, their estimates remain consistent and efficient in establishing the short-run and long-run relationship among net capital flow volatility, financial deepening and capital market performance.

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study. The advantages of using both approaches include the need to ensure consistency and check for robustness as well as validate the results.

Table 5.4:Pedroni ADF Residual based Cointegration Test Ho: There is no Co-integration

Trend Assumption: No deterministic Trend t-Statistic Prob

ADF -10.44930 0.3493

Source: Author’s computation from output result from the regression analysis

The result from the Pedroni Residual ADF test in Table 5.4 is insignificant at 5% with t-statistics –10.44930; hence, the null hypothesis is rejected and there is established evidence that the variables are co-integrated in the long run.

Table 5.5: Johansen Fisher-Based Cointegration Test of Variables

Eigen value Trace Statistic 5% Critical Value Hypothesised No. of CE(s)

0.771964 1558.525 95.75366 None *

0.407932 760.2689 69.81889 At most 1 *

0.362378 477.2368 47.85613 At most 2 *

0.198270 234.2320 29.79707 At most 3 *

0.115343 114.9006 15.49471 At most 4 *

0.086274 48.72101 3.841466 At most 5 *

Eigen value Maximum Eigen

Value Statistic

5% Critical Value Hypothesised No. of CE(s)

0.771964 798.2565 40.07757 None *

) 1 : (H₀  =

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0.407932 283.0322 33.87687 At most 1 *

0.362378 243.0048 27.58434 At most 2 *

0.198270 119.3313 21.13162 At most 3 *

0.115343 66.17963 14.26460 At most 4 *

0.086274 48.72101 3.841466 At most 5 *

Source: Author’s computation from output result from the regression analysis Note: “***” represents rejection of null hypothesis at 5% level of significance

Employing the Johansen cointegration test methodology to estimate the cointegrating relationship among the variables; two likelihood estimators were used for the cointegrating rank test: the trace test and the maximum Eigen value test. The cointegration relationship was properly tested using the trace and the maximum Eigen value statistical tests. As shown in Table 5.5, the trace test statistics show five cointegrating vectors at 5% level of significance. This finding is similar to that of Österholm and Hjalmarsson (2007) who carried out a cointegration analysis using the Johansen methodology when variables are near-integrated. The finding in this study implies that a long-run equilibrium association exists among the variables under investigation. Hence, the short- and long- run relationships among capital flow volatility, financial deepening and capital market performance can be established in low-income SADC countries. In addition, the maximum Eigen value test indicates five standardized cointegrating equations at 5% level of significance. Further details on the five cointegrating equations for the trace test and the maximum Eigen value test and their adjustment coefficients are presented in Table 5.6 below.

146 Table 5.6: Cointegration Equations

5 Cointegrating Equation(s):

Log

likelihood -31197.31

Normalized cointegrating coefficients (standard error in parentheses)

DCMP DRGDP DCPI DFD DINT DNFR

1.000000 0.000000 0.000000 0.000000 0.000000 -5.888835 (0.63878) 0.000000 1.000000 0.000000 0.000000 0.000000 1289019.

(155809.) 0.000000 0.000000 1.000000 0.000000 0.000000 1.84E+11 (2.3E+10) 0.000000 0.000000 0.000000 1.000000 0.000000 -0.985046

(0.08788) 0.000000 0.000000 0.000000 0.000000 1.000000 21.51139 (2.23091) Adjustment coefficients (standard error in parentheses)

D(CMP) -1.059024 4.07E-07 -2.29E-11 -0.337647 -0.025547 (0.07068) (9.4E-08) (2.2E-12) (0.89272) (0.02276) D(RGDP) -69175.23 -0.955139 3.71E-06 1303892. -36207.70 (28639.0) (0.03802) (9.0E-07) (361701.) (9222.82) D(CPI) -2.51E+09 101.5832 -1.409793 -2.96E+11 -2.06E+08 (2.9E+09) (3837.98) (0.09052) (3.7E+10) (9.3E+08) D(FD) 0.015850 -1.65E-08 1.38E-12 0.100455 -0.003352

(0.00386) (5.1E-09) (1.2E-13) (0.04874) (0.00124) D(INT) -0.179295 -2.95E-07 -1.46E-11 -10.18948 -0.394649 (0.13025) (1.7E-07) (4.1E-12) (1.64503) (0.04195) D(NFR) -0.057986 -1.92E-07 6.65E-12 2.692062 -0.009834 (0.02541) (3.4E-08) (8.0E-13) (0.32096) (0.00818) Source: Author’s computation from output result from the regression analysis

Note: CPM (Capital Market Performance), RGDP (Real Gross Domestic Product), FD (Financial Deepening), CPI (Consumer Price Index), INT (Interest Rates), NFR (Net Foreign Remittance) & NFPI (Net Foreign Portfolio Investment).

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