Welcome To Meo School of Research

Saeed A.Meo
Research associate at Superior university Lahore Pakistan
First of All I would like to acknowledge that I’m using the codes of NARDL provided by the father of
NARDL approach ( Matthew Greenwood-Nimmo) on my email request.

In addition I would like dedicate this video to my teachers and friends most specially

Tella Oluwatoba Ibrahim, (Nigeria), Shahzad Ali(superior university), Sayed Hossain

(Bangladesh ), Anees Muhammad(econometric club), Atiq Rehman(pide), Olasehinde
Timilehin(Ngeria), Ch.Haqnawaz, Mahyudin Ahmad(Cambridge uk), Muili Adebayo
Hamid(nageria), Hassan(Incef university),Muhammad Ilyas superior uni, salman rizavi
superior uni, Matthew Greenwood-Nimmo (father of nonlinear ARDL),Shishir
Shakya(Nepal), Ibn_Abdullah - PhD@INCEIF, Seye Olasehinde-Williams, Suborno Aditya
,sunita Arora(India), Idrees Aboo AbdiLlaah(nige ria) and all respected teachers.

Debate on NARDL( NON LINIEAR ARDL )

Mostly researchers ask question what is difference between ARDL and NARDL

Ok let me share my thought on two basic terminologies

The first one is linear relationship and second is nonlinear relationship

Linear relationship

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
A linear relationship is one where increasing or decreasing one variable n times
will cause a corresponding increase or decrease of n times in the other variable too.
In simpler words, if you double one variable, the other will double as well.

Examples

 For a given material, if the volume of the material is doubled, its weight will also
double. This is a linear relationship. If the volume is increased 10 times, the
weight will also increase by the same factor..

 The cost of objects is usually linear. If a notebook costs $1, then ten notebooks
will cost $10.

 The force of gravity between the earth and an object is linear in nature. If the
mass of the object doubles, the force of gravity acting on it will also be double.

Another example of linear relationship

A relationship of direct proportionality that, when plotted on a graph, traces a

straight line. In linear relationships, any given change in an independent variable
will always produce a corresponding change in the dependent variable. For
example, a linear relationship between production hours and output in a factory
means that a 10 percent increase or decrease in hours will result in a 10 percent
increase or decrease in the output

Another example of linear relationship

A linear relationship exists when two quantities are proportional to each other. If
you increase one of the quantity, the other quantity either increases or decreases at
a constant rate. For example, if you get paid $10 an hour, there is a linear
relationship between your hours worked and your pay. Working another hour

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
always results in a $10 pay increase, regardless of how many hours you already
worked.

Non-linear relationship

Most relationships in economics are, unfortunately, nonlinear. Each unit change

in the x variable will not always bring about the same change in the y variable.

As their name suggest, non-linear relationships are not linear, which means by
doubling one variable, the other variable will not double.
A nonlinear relationship is a type of relationship between two entities in which change in one entity
does not correspond with constant change in the other entity. This might mean the relationship
between the two entities seems unpredictable or virtually absent

NARDL
The Non-linear ARDL model recently developed by Shin, Yu, and Greenwood-Nimmo 2014
uses positive and negative partial sum decompositions allowing detecting the asymmetric effects
in the long and the short-term. Compared to the classical cointegration models, NARDL models
present some other advantages. Firstly, they perform better for determining cointegration
relations in small samples (Romilly, Song, & Liu, 2001). Secondly, they can be applied
irrespective of whether the regressors are stationary at level or at the first difference (i.e. I(0) or
I(1)). They cannot be applied however if the regressors are I(2).The other advantages of
NARDLTherefore, the asymmetric NARDL framework of Shin et al. (2013) is particularly
suitable for our research problem as it allows us not only to gauge the short- and long-run
asymmetries, but also to detect hidden cointegration.. For example, a positive shock of oil prices
may have a larger absolute effect in the short-run while a negative shock has a larger absolute
effect in the long-run (or vice-versa).
Steps for NARDL

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

In simple, we have six steps (but major are first 4) for NARDL
Step 1. In first step, we shall check unit root, the purpose of unit root test for
ARDL is only to confirm that we don’t have any variable which stationary at
second difference. Otherwise not need of unit root.
Step 2. Generate positive and negative series for those variables for which you
want to see asymmetric relationship, nonlinear relationship (suppose you wish for
one variable or two or three as you wish)
Step 3. Test cointegration, using bound test, with Wald test
Step 4. Run NARDL , using stepwise regression under ECM
Step 5. Check the asymmetries with Wald test, even from the step 4 we understand
either asymmetric relationship exist or not but we can check it for further
confirmation via Wald test.
Step 6. Multiplier effect (sorry I’m not going to explain procedure because I don’t
have idea this using EVIEWS but STATA
NOTE : I followed general-to-specific approach as in all papers adopted.

Preconditions for NARDL

First of all check stationary all the assumptions are same for Nonlinear
ARDL as for ARDL.

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

Step#1

In first step we will generate first difference series of variables dependent and
independents

genr de =e-e(-1)
genr de =e-e(-1)
genr dx =x-x(-1)
genr dy =y-y(-1)
genr dz =z-z(-1)
Note: first of all I have created first difference series for all variables which are part of
our model. Therefore you also create first difference series for all variables.
Suppose my model is as follow, and the procedure is following of creating difference
series.
Y=f(e,x and z)

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

Note: in command bar type one command and

then enter, again type next command again enter
and so you will see new series will be generate
automatically. Further if you know any other way
of generating first difference series you may carry
with that

Step#2

Now we shall generate a positive and negative series from an original variable let
suppose I wish to generate positive and negative series for my variable “E” why
I’m generating positive and negative series because of I believe that there is a
nonlinear relationship between “E” and dependent variable, means I think positive
change and negative change don’t effect same dependent variable. (Generate
positive and negative series for those variables, which are used to subject as
asymmetry variables), and the procedure is following.
Generate positive and negative series for those variables ,which are used to subject as
asymmetry variables(if you wish to use only one variable, and want to see asymmetry effect
then generate only for that one variable negative and positive series, what if you wish to see
more than one variables effect then produce negative and positive series for other one)

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

Generate a positive series when the first difference of variable is

greater than or equal to zero (why this step because it will be used
genr pos =de>=0 in next steps.
genr depositve =pos*de
genr denegative =(1-pos)*de
genr epositve = @cumsum(depositve)
genr enegative = @cumsum(denegative)
Now I’m generating positive series for my variable which is used to
see asymmetry relationship but series will be in difference form

Now I’m generating negative series for my variable which is used to

Note: above command is
see asymmetry relationship but series will be in difference form
copy pate bellow
intentionally so that you
can copy it easily Now I’m generating partial sum from positive series which is
generated in step 2

Now I’m generating partial sum from negative series which is

genr pos =de>=0 generated in step 3
genr depositve =pos*de
genr denegative =(1-pos)*de
genr epositve = @cumsum(depositve)
genr enegative = @cumsum(denegative)

genr pos =dx>=0

genr dxpositve =pos*dx
genr dxnegative =(1-pos)*dx
genr xpositve = @cumsum(dxpositve)
genr xnegative = @cumsum(dxnegative)

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

You can see here I have generated negative and

positive series for two variables namely x and e ,if
you wish to use only one variable as to see
asymmetry relationship then no issue so it’s all
up to you ,

Note: note again in first step we create first

difference series for all the variables, we
generative negative and positive series only for
those variables which will be used as nonlinear.

Step#3 (NARDL ,ECM based via Step wise regression)

Now we shall run stepwise regression procedure is following

Go to quick ------- estimate equation------then from method---------

stepl…stepwise least square or follow the following procedure I have first
select dependent variable then all independent

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
put your equation

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
And ok and bellow are your results of NARDL

If the two partial sums carry the same

coefficient in sign and size, the effects are
symmetric. Otherwise, they are
asymmetric

Note:

Katrakilidis and Trachanas (2012), we adopt the

general-to-specific procedure to arrive
at the final specification of the NARDL model
by trimming insignificant lags.

A testing down procedure, termed as the

general- to-specific procedure (Hendry,
1995), is adopted to eliminate variables
which are either insignificant or
economically (or theoretically)
unacceptable.

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

OUTPUT COPY PAST FROM EVIEWS.

Dependent Variable: D(Y)
Method: Stepwise Regression
Date: 06/15/17 Time: 23:06
Sample (adjusted): 1974 2014
Included observations: 41 after adjustments
Number of always included regressors: 7
Number of search regressors: 23
Selection method: Uni-directional
Stopping criterion: p-value = 0.1

Variable Coefficient Std. Error t-Statistic Prob.*

C -1103.456 722.1756 -1.527960 0.1422

Y(-1) 1.528591 0.393730 3.882330 0.0009
Z(-1) 3.307038 2.345821 1.409757 0.1740
EPOSITVE(-1) -359.2570 150.0028 -2.395001 0.0265
ENEGATIVE(-1) -700.1416 248.8427 -2.813591 0.0107
XPOSITVE(-1) -4004.938 1340.942 -2.986660 0.0073
XNEGATIVE(-1) 2265.230 593.2002 -3.818660 0.0011
DZ(-1) 6.343541 1.416685 4.477736 0.0002
DY(-3) 0.498626 0.292503 1.704689 0.1037
DZ 2.953691 1.382880 2.135898 0.0452
DEPOSITVE(-3) -1584.574 919.0621 -1.724121 0.1001
DENEGATIVE(-1) -2491.512 744.9441 -3.344563 0.0032
DY(-2) -1.739739 0.336550 -5.169337 0.0000
DXNEGATIVE(-3) 3611.912 759.0029 4.758758 0.0001
DZ(-3) -0.963955 0.234068 -4.118275 0.0005
DXNEGATIVE(-1) 1749.393 849.9798 2.058158 0.0528
DY(-1) -2.083093 0.534505 -3.897234 0.0009
DXPOSITVE(-2) 3185.580 618.0900 5.153910 0.0000
DENEGATIVE(-2) 2788.516 972.7020 2.866773 0.0095
DXNEGATIVE -461.6663 255.6860 -1.805599 0.0861
DXPOSITVE(-1) 3724.146 1080.190 3.447675 0.0025

R-squared 0.817243 Mean dependent var 29.66630

Adjusted R-squared 0.634486 S.D. dependent var 45.90187
S.E. of regression 27.75124 Akaike info criterion 9.790989
Sum squared resid 15402.63 Schwarz criterion 10.66867

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
Log likelihood -179.7153 Hannan-Quinn criter. 10.11059
F-statistic 4.471745 Durbin-Watson stat 2.550126
Prob(F-statistic) 0.000758

Selection Summary

Removed DXPOSITVE(-3)
Removed DXNEGATIVE(-2)
Removed DXPOSITVE
Removed DEPOSITVE(-2)
Removed DEPOSITVE
Removed DEPOSITVE(-1)
Removed DENEGATIVE
Removed DENEGATIVE(-3)
Removed DZ(-2)

*Note: p-values and subsequent tests do not account for stepwise selection.
Note: I am following same procure as followed by M A T T H E W G R E E N W O O D - N I M M O in his
paper title as Asymmetric Cointegrating Relationships, Asymmetric Dynamic Multiplier s, Nonlinear
ARDL (NARDL) ECM-based Estimation and Tests, Nonlinear Unemployment-Output Relationship. If you
wish to download code for NARDL please search this link from official site of M A T T H E W G R E E N
W O O D - N I M M O link is here:
http://www.greenwoodeconomics.com/publications.html

Note :The existing literature regarding asymmetric cointegration is dominated by three types
of nonlinear models, all derived from the basic linear Error Correction Model (ECM(Author:
Rania Jammazi Amine Lahiani Duc Khuong Nguyen, 2014)

If you wish to copy above command you can from below.

d(y) c y(-1) z(-1) epositve(-1) enegative(-1) xpositve(-1) xnegative(-1)

dy(-1 to -3) dz(-0 to -3) depositve(-0 to -3) denegative(-0 to -3) dxpositve(-0 to -3) dxnegative(-0 to -3)
Note: note we are going to run above regression under error correction model
that’s why first variable is in difference form in above box. further changing will
be in option tab and all the detail of option tab is blow.

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

Step#4
Now we shall confirm either cointegration exist or not if cointegration exists then
we shall carry estimation otherwise not, so procedure of cointegration is following
And we shall check cointegration via wald test ,go to view of resulted window of
NARDL ,Coefficient diagnostic and then wald test.

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

I have start from c(2), the reason

is that at c(1) we have constant

F statistics calculated value

Note: based on the estimated NARDL, we perform a test for the presence of cointegration among the
Variables using a bounds testing approach of Pesaran et al. (2001) and Shin et al. (2011).

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

Note here our calculated f statistics values is greater than as compare to upper
bound value at 5% level of significance ,If you wish to download these critical
value you can from Google.as we have total three regressors that’s why I selected
K 3. Our calculated value of bound test is 10.25 and upper bound value at 5%
level of significance is 4.35 hence we shall reject null hypothesis of no
cointegration and say there is cointegration.

Step#5
Deriving long run coefficients
The procedure for the deriving long run coefficients is adopted from the procedure
adopted by Matthew Greenwood-Nimmo “Modelling Asymmetric Cointegration and Dynamic
Multipliers in a Nonlinear ARDL Framework” and all other good paper published in good journals follows
same procedure

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

Ok let’s calculate long run coefficient for

Calculate your long run coefficient like this via wald test and if you wish you can
through calculation, not if you are calculating long run coefficient via wald test
then procedure is same ,view, coefficient diagnostic and then wald test.
Long run coefficient of z(-1)1 = -c(3)/c(2)=0 (-2.163454)
Long run coefficient of epositive(-1)= -c(4)/c(2)=0 (235.0248)
Long run coefficient of enegative (-1)= -c(5)/c(2)=0
Long run coefficient of xpositive (-1)= -c(6)/c(2)=0
Long run coefficient of xnegative(-1)= -c(7)/c(2)=0 (1481.907)

Note: at c(1) we have constant and c(2) is conversion coefficient so divide

all your long run coefficients with c(2) or conversion coefficient and put – at
first of c(2), c(3) , c(4) , c(5) and c(6)
Step #6 Testing the presence of asymmetry:
We will check asymmetry with the help of wald test
Asymmetry meaning not equal means now I’m going to see either the positive and negative series effect
on dependent variable is same or there is difference as from coefficient value calculated above for long

11
Note: for z(-1) I have put c(3) because of z(-1) is at c(3) and divide all coefficients with c(2)

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
run coefficient it is clear that coefficient are not same but we further confirm asymmetry with the help of
wald test;
I will put

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

Note: In particular, the long-run symmetry can be tested by using a Wald test of the null
hypothesis
Null hypothesis: there is no asymmetry
Alternative: there is asymmetry
Here our probability value is insignificant so we shall accept null hypothesis of no
asymmetry means there is no inequality, coefficients are same
Kindly do same procedure for the other variables if you used as
Good luck ……………

Online econometric, email : saeedk8khan@gmail.com

 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
BEST PAPERS ON NONLINEAR ARDL

 What drives housing price dynamics in Greece: New evidence from asymmetric
ARDL Cointegration

 Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear

ARDL Framework

 Nonlinear ARDL Approach, Asymmetric Effects and the J-Curve

 New Evidence on Asymmetric Gasoline Price Responses
 Price Transmission in the Swedish Pork Chain: Asymmetric nonlinear ARDL
 Price Transmission in the Swedish Pork Chain: Asymmetric non linear ARDL
 Exchange rate nonlinearities in EMU exports to the US
 Title: A wavelet-based nonlinear ARDL model for assessing the exchange rate pass -
through to crude oil prices

 Oil and food prices in Malaysia: a nonlinear ARDL analysis

 Investor emotional biases and trading volume’s
 asymmetric response: A non-linear ARDL approach tested in S&P500 stock...
Appendix
Note this highlighted discussion is not a part of NARDL I m just tryi ng to share
with you what is logic behind the setting which we done in above screenshot.
For the Uni-directional and Stepwise methods you may specify the direction of the
method using the Forwards and Backwards radio buttons. These two methods
allow you to provide a Stopping Criteria using either a p-value or t-statistic
tolerance for adding or removing variables. You may also choose to stop the
procedures once they have added or removed a specified number of You may also
set the maximum number of steps taken by the procedure. To set the maximum
number of additions to the model, change the Forwards steps, and to set the
maximum number of removals, change the Backwards steps. You may also set the
total number of additions and removals. In general it is best to leave these numbers

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
at a high value. Note, however, that the Stepwise routines have the potential to
repetitively add and remove the same variables, and by setting the maximum
number of steps you can mitigate this behavior.

The Swapwise method lets you choose whether you wish to use Max R-squared or
Min Rsquared, and choose the number of additional variables to be selected. The
Combinatorial method simply prompts you to provide the number of additional
variables. By default both of these procedures have the number of additional
variables set to one. In both cases this
merely chooses the single variable that will lead to the largest increase in R-
squared

Example of 5 regressors
As an example we use the following code to generate a workfile with 40
independent variables
(X1–X40), and a dependent variable, Y, which is a linear combination of a
constant,
variables X11–X15, and a normally distributed random error term. Given this data
we can use a forwards stepwise routine to choose the “best” 5 regressors, after the
constant, from the group of 40 in XS. We do this by entering “Y C” in the first
Specification box of the estimation dialog, and “XS” in the List of search
regressors box. In the
Stopping Criteria section of the Options tab we check Use Number of Regressors,
and
enter “5” as the number of regressors. Estimating this specification yields the
results:

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan

The top portion of the output shows the equation specification and information
about the stepwise method. The next section shows the final estimated specification
along with coefficient estimates, standard errors and t-statistics, and p-values.
Note that the stepwise routine chose the “correct” five regressors, X11–X15. The
bottom portion of the output shows a summary
of the steps taken by the selection method. Specifications with a large number of
steps
may show only a brief summary

Uni-directional-Forwards
The Uni-directional-Forwards method uses either a lowest p-value or largest t-
statistic criterion for adding variables.
The method begins with no added regressors. If using the p-value criterion, we
select the variable that would have the lowest p-value were it added to the

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 Welcome To Meo School of Research
Saeed A.Meo
Research associate at Superior university Lahore Pakistan
regression. If the p-value is lower than the specified stopping criteria, the variable
is added. The selection continues by selecting the variable with the next lowest p-
value, given the inclusion of the first variable.
The procedure stops when the lowest p-value of the variables not yet included is
greater than the specified forwards stopping criterion, or the number of forward
steps or number of added regressors reach the optional user specified limits. If
using the largest t-statistic criterion, the same variables are selected, but the
stopping criterion is specified in terms of the statistic value instead of the p-value.
Uni-directional-Backwards
The Uni-directional-Backwards method is analogous to the Uni-directional-
Forwards method, but begins with all possible added variables included, and then
removes the variable with the highest p-value. The procedure continues by
removing the variable with the next highest p-value, given that the first variable
has already been removed. This process continues until the highest p-value is less
than the specified backwards stopping criteria, or the number of backward steps or
number of added regressors reach the optional user specified limits. The largest t-
statistic may be used in place of the lowest p-value as a selection criterion.

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