Introductory Mathematics and Statistics for Islamic Finance, + Website

Chapter 17Vector Autoregressive Analysis (VAR)

Vector Autoregressive Model (VAR) is a statistical model used to capture the linear interdependencies among multiple time series. VAR models generalize the univariate autoregression (AR) models by allowing for more than one evolving variable. For instance, we may model the stock price index as a univariate and omit the influence of any other variable that may affect the stock index. Financial analysts, however, want to test relationships between the stock price index and other relevant variables such as the interest rate and assess causality between two or more variables. It may happen that variable causes , but does not cause . In this instance, is exogenous and is endogenous. If there is two-way causality between and , the two variables ...