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

Table (5) presents results of VAR lag order selection criteria for three tests. The
maximum possible lag length considered was eleven (months). The first column provides
the lag length for each test and the last three columns of the table illustrate the test statistics.
In this case the choice is ambiguous, because the reveal only one lag is needed by the SC,
eleven lags with the AIC and HQ. Further examination found serial correlation at one lag.
Therefore, the eleven lags length of VAR have been selected by AIC and HQ information
criterion, since they are not serially correlated.
Having confirmed the existence of unit roots for all the data series (see table 3). The next
step is to check the existence of long-run relationship among the variables. The estimated
results of Johansen co-integration test are reported in table (6). Since calculated λmax
(405.585) and Trace (1694.175) are above the critical values (70.53513) and (285.1425)
respectively at 1 percent, it can be clearly rejected the null hypothesis stating there is no cointegration.
Moreover, the second null hypothesis stating two versus three co-integrating
vectors, it also can be rejected the null hypothesis since calculated λmax (336.8631) and
Trace (1288.59) are above the critical values (64.50472) and (239.2354) respectively.
Thus, it could be seen from the table 6 that Johansen Co-integration analyses based on
unrestricted VAR results indicate 11 co-integrating equations in the system. That means the
results confirmed that foreign direct investment and its determinants, share a long run
equilibrium relationship in Jordan. This indicates that there is possibility of causality
between inward foreign direct investment in Jordan, country risk, macroeconomic factors
and stock market price. Therefore, Error Correction Model (ECM) is implemented to
investigate the direct of causality between inward FDI and its determinants.
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