A Dynamic Model for determining Inward Foreign ... - Business School

uncorrelated and normally distributed and that their variances do not vary with the effects
being modelled. Therefore, the White test was applied to detect whether the errors are
heteroskedasticity or homoskedasticity
( ) (
Where
The ARCH (1) model indicates that when a big shock happens in period , it is
more likely that the value of will be bigger as well. This is, when is large or small,
the variance of the next error term is also large or small. The estimated coefficient of
has to be positive for positive variance. The ARCH model implanted in E-view in the mean
and variance equations where stated above respectively. The results of ARCH show that the
model is stable.
3.3.2 Lagged Model Specification
In the second stage the lagged model is introduced to explore the dynamic behaviour of
Jordanian country risk (financial, economic and political risk), stock market price (banking,
industry, services and general sectors) and macroeconomic factors (inflation, interest rate
and GDP). Testing for long and short run relationships the following dynamic methods are
implemented: firstly, vector autoregressive (VAR) model, Granger causality, Johansen’s
Co-integration test and Error Correction Model.
3.3.2.1 Vector Autoregressive model
VAR model has the advantage of treating each variable under the study as an endogenous
variable when economic theory cannot offer a priori information regarding the variables
used in the VAR. This makes VAR estimation simple and OLS estimation method can be
used provided all variables included in the VAR are integrated of the same order Gujarati
(1995 749). In this case, the time series is affected by current and past values of ,
simultaneously, as well as the time series is a series affected by current and past values
of the series. Therefore, the following simple bivariate VAR model is considered
(Brooks 2008 290, 291)
( )
( )
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