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Contents
Introduction.............................................................................................................................................. 1
Section 1: Descriptive Analysis ............................................................................................................... 2
1.1 Visual Analysis and Unit Root Tests ............................................................................................. 2
1.2 ARIMA Models ............................................................................................................................... 4
1.2.2: Box-Jenkins Identification ...................................................................................................... 4
1.2.2 Model Selection ...................................................................................................................... 7
1.2.3 Forecast Evaluation and Residual Diagnostics .................................................................... 11
Section 2: Robustness Check ............................................................................................................... 15
2.1 Pretesting .................................................................................................................................... 15
2.2 Correlations ................................................................................................................................. 18
References ............................................................................................................................................ 22

Introduction

Section 1: Descriptive Analysis

1.1 Visual Analysis and Unit Root Tests
Figure 1 displays the SAPU index in levels for the full sample; 1994m1 to 2014m6. Several features are
notable here. Firstly, there are several holes in
Figure 1: SAPU 1994m1 to 2014m6

the data, starting from 2002m3 and ending in

300

2002m12. As discussed in McLean (2015:***)

250

these holes are due to a sudden drop in the

200

volume of news captured by SAMedia over this

150

period the reason for this sudden sparseness

100

has not been ascertained. This data feature

effectively divides the index into two periods; the

50

first runs from 1994m1 to 2002m2, the second

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

from 2003m1 to 2014m6.

Secondly, the behaviour of the series appears to
Figure 2: SAPU 1994m1 to 2002m2

differ markedly between these two sample

140

periods. As can be seen in Figure 2, the period

120

1994m1 to 2002m2 appears to be characterized

100

by a constant mean and variance. The series

80

does appear to exhibit some degree of cyclicality

60

over this period, but an Augmented Dickey-

40

Fuller (ADF) test indicates that we can reject the

20

hypothesis that this series is I(1) at the one

0
1994

1995

1996

1997

1998

1999

2000

2001

percent level of significance (the test was

specified with a constant; SIC automatic lag selection selected zero lags see Table 1).
In contrast with Figure 2, a visual inspection of Figure 3 suggests that the mean and variance of the
data generating process (DGP) appears to increase as a function of time over the period 2003m1 to
2014m6. This portion of the index thus appears to be nonstationary. As is common practice, the
observed increase in the variance of SAPU is
addressed by taking the log of the series (****)

Figrue 3: SAPU 2003m1 to 2014m6

300

as can be seen in Figure 4, this course of

250

action ostensibly reduces the high variance

observed in the latter half of the series. For this

200

reason, L_SAPU, the log transformed SAPU

150

index, is used throughout the remainder of this

100

section.
Regarding the apparent nonstationarity of the

50

0
2004

2006

2008

2010

2012

2014

series, Table 2 displays ADF test results for the

2

L_SAPU 2003m1 to 2014m6 in levels. The test is specified with a constant and 3 lags. As indicated by
the p-value of 0.4011, we cannot reject the hypothesis that this portion of the series is characterized by
a unit root for any traditional level of significance. This test thus corroborates the hypothesis that the
series is nonstationary.
Regarding

the

nature

of

this

apparent
Figure 4: L_SAPU 2003m1 to 2014m6

nonstationarity, if one simply looks at the graph

of the series it is difficult to tell whether a trend

6.0

5.5

or a unit root accounts for the nonstationaity; the

5.0

series does appear to be characterized by a

slight degree of cyclicality, but it also appears to

4.5

trend upward quite consistently. ADF tests also

4.0

provide little guidance here: Table 3 shows that

3.5

for an ADF test on the level of the series

3.0
2004

2006

2008

2010

2012

2014

specified with a constant and a trend we can

reject the hypothesis that the series is nonstationary at the one percent level of significance; as can be
seen in Table 4, the same result is achieve for an ADF test on a constant and the first difference of the
series.

Table 1: ADF Test, 1994m1 to 2002m2 (Levels)

Null Hypothesis: SAPU has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=11)
t-Statistic
-5.577842

Augmented Dickey-Fuller test statistic:

Test critical values:

1% level
5% level
10% level

Prob.*
0.0000

-3.499167
-2.891550
-2.582846

*MacKinnon (1996) one-sided p-values.

Table 2: ADF Test, 2003m1 to 2014m6 (Levels)

Null Hypothesis: L_SAPU has a unit root
Exogenous: Constant
Lag Length: 3 (Automatic - based on SIC, maxlag=13)

Augmented Dickey-Fuller test statistic

Test critical values:

1% level
5% level
10% level

t-Statistic

Prob.*

-1.755684
-3.479656
-2.883073
-2.578331

0.4011

*MacKinnon (1996) one-sided p-values.

Table 3: ADF Test, 2003m1 to 2014m6 (Levels)

Null Hypothesis: L_SAPU has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=13)

Augmented Dickey-Fuller test statistic

Test critical values:

1% level
5% level
10% level

t-Statistic

Prob.*

-9.393356
-4.026429
-3.442955
-3.146165

0.0000

t-Statistic

Prob.*

-13.00195
-3.479656
-2.883073
-2.578331

0.0000

*MacKinnon (1996) one-sided p-values.

Table 4: ADF Test, 2003m1 to 2014m6 (1st Difference)

Null Hypothesis: D(L_SAPU) has a unit root
Exogenous: Constant
Lag Length: 2 (Automatic - based on SIC, maxlag=13)

Augmented Dickey-Fuller test statistic

Test critical values:

1% level
5% level
10% level

*MacKinnon (1996) one-sided p-values.

1.2 ARIMA Models

Given the findings discussed above, common practice dictates that SAPU is trend stationary (****).
However, economic reasoning might motivate us to treat the series as difference stationary. To
elaborate, one would not expect the DGP of the series to be characterized by a deterministic trend, but
rather by the stochastic development of social and political events. Thus, while a deterministic trend
might fit well with the SAPU sample observed over 2003m1 to 2014m6 in-sample, one would expect
that modelling SAPU with a deterministic trend would result in poor foresting and out-of-sample-fit. This
section tests this hypothesis by estimating and evaluating a battery of ARIMA(p,d,q) models.

1.2.2: Box-Jenkins Identification

In following the Box-Jenkins (1976) estimation strategy, this process is initiated with a visual and
statistical inspection of the index, its autocorrelation function (ACF) and its partial autocorrelation
function (PACF). Table 5 presents descriptive statistics for L_SAPU (column 5.1) and two
transformations of L_SAPU: D(L_SAPU) (column 5.2) and DT(L_SAPU) (column 5.3), the first
difference of the log of SAPU and the detrended log of SAPU respectively. For D(L_SAPU) and
DT(L_SAPU), the Jarque-Bera statistic indicates that we can reject the hypothesis that these series are
normally distributed at the one percent level of significance. The third and fourth central moment provide
an indication of the source of this non-normality. The third central moment indicates that D(L_SAPU) is
4

skewed right and that DT(L_SAPU) is skewed

Figure 5: D(L_SAPU)

left;

skewness

DT(L_SAPU).

is

The

most
fourth

pronounced
central

in

moment

indicates that both series are leptokurtic, with

D(L_SAPU)

displaying

fatter

tails

1.5

1.0

0.5

than
0.0

DT(L_SAPU). In sum, these test statistics

indicate that D(L_SAPU) and DT(L_SAPU) are

-0.5

both characterized by a high proportion of data

-1.0

residing

-1.5

in

the

tails

of

their

respective

2004

2006

2008

2010

2012

2014

2012

2014

distributions, that D(L_SAPU) has a long right

tail, and that DT(L_SAPU) has a long left tail.
A visual inspection of these series provides an
Figure 6: DT(L_SAPU)

indication of the source of the non-normality of

0.8

D(L_SAPU) and DT(L_SAPU). Referring back to

0.4

Figure 4, there appears to be a large downward

spike in the index at 2005m1 and 2003m2.
Column 5.1 in Table 5 indicates that L_SAPU has

0.0

-0.4

an estimated standard deviation of approximately

-0.8

0.42 and a mean of approximately 4.75;

observation 2005m1, which has a value of 3.26,

-1.2
2004

2006

2008

2010

is 1.49 units below the mean of the series, and is

exactly one unit below observation 2004m12 and is 1.38 units below observation 2004m2; this
observation thus lies more than two standard deviations below the mean of the series and away from
its neighbouring observations. Similarly, observation 2003m2 (3.49 units) is 0.78 units (less than two
standard deviations) below observation 2003m1, and is 1.06 and 1.26 units below observation 2003m3
and the mean of L_SAPU respectively (both more than two standard deviations).
As can be seen in Figure 5 and Figure
6,

differencing

and

Table 5: Descriptive Statistics for L_SAPU Transformations

detrending
5.1
L_SAPU

5.2
D(L_SAPU)

5.3
DT(L_SAPU)

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

4.746310
4.693905
5.644762
3.255166
0.415366
-0.286317
3.365061

0.007362
-0.012206
1.383108
-1.006805
0.345102
0.357227
4.573799

1.03E-16
-0.008638
0.612533
-1.142621
0.272905
-0.592941
4.478033

Jarque-Bera
Probability

2.651773
0.265567

17.05243
0.000198

20.64765
0.000033

L_SAPU further exacerbates the

irregularity of these observations,
particularly

observation

2005m1.

Figure 5 shows that differencing

L_SAPU causes the deviation in
2005m1

to

affect

observation

2005m2; 2005m1, with a value of

-1.01, is just less than three standard
deviations below the mean of the
series, and 2005m2, with a value of
1.38, is approximately four standard

deviations above the mean of the series. 2003m3 in

Table 6: Accounting for Outliers

Figure 5 (with a value of 1.05) is also approximately

6.1
D(L_SAPU)

6.2
DT(L_SAPU)

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

-1.76E-17
-0.008600
0.695292
-0.748037
0.294703
-0.010816
2.558378

2.35E-16
-0.015972
0.602350
-0.624201
0.246021
-0.037858
2.755471

Jarque-Bera
Probability

1.091530
0.579398

0.365859
0.832827

three standard deviations from the mean of the

series. These observations appear to account for the
rightward skewness and thick tails indicated in 5.2.
For

DT(L_SAPU),

observations

2005m1

and

2003m2 are respectively 1.14 and 0.72 units (more

than three and more than two standard deviations)
below the mean of the series, thus accounting for the
leftward skewness and thick tails indicated in 5.3.
To account for the irregularity of these observations,
we restrict the sample to exclude all dates prior to
2003m3 and add dummy variables for observation

2005m1 and 2005m2 to D(L_SAPU) and a dummy variable for observation 2005m1 to DT(L_SAPU).
Table 6 shows descriptive statistics for the residuals of D(L_SAPU) regressed on a constant and these
dummies (6.1) and for DT(L_SAPU) inclusive of the 2005m1 dummy (6.2). For both series, the JarqueBare statistic indicates that the hypothesis of normality cannot be rejected at any traditional level of
significance. All subsequent models presented in this section include the relevant dummy variables and
are estimated on samples which exclude 2003m2. This resolves the issue of outliers.
Turning now to the issue of lag length selection, Figure 7 and 8 respectively display the ACFs and
PACFs for L_SAPU, D(L_SAPU) and DT(L_SAPU). The ACF for L_SAPU shows a markedly slow linear
decay, a feature indicative of a unit root (Enders, 2010:73); however, the ACFs for D(L_SAPU) and
DT(L_SAPU) show that either approach removes this persistence, reducing the number of significant
Figure 7: SAPU Autocorrelation Function
0,800
0,600
0,400
0,200
0,000
-0,200
-0,400
-0,600
1

2
L_SAPU

4
D(L_SAPU)

DT(L_SAPU)

10

Significance

Figure 8: SAPU Partial Autocorrelation Function

0,800
0,600
0,400
0,200
0,000
-0,200
-0,400
-0,600
1

2
L_SAPU

D(L_SAPU)

DT(L_SAPU)

10

Significance

lags to one in both cases. Turning to Figure 8, the PACF of D(L_SAPU) indicates that our ARIMA model
may need to contain as many as three lags, while the PACF of DT(L_SAPU) indicates that one lag may
be sufficient.

1.2.2 Model Selection

Given the ambiguity of these indicators, the model selection process employed here proceeds as
follows: Two sets of models are generated here; a set of ARIMA(p,1,q) models (i.e. a set with
D(L_SAPU) as the dependant variable) all specified with a constant, and a set of ARIMA(p,0,q) models
(i.e. a set with L_SAPU as the dependant variable) all specified with a constant and a linear time trend.
In consideration of the PACF of D(L_SAPU), models with up to three lags are considered; all models
are specified to contain either an AR or an MA term at every lag length lower than the models longest
lag. Carrying out the above yield two sets of fourteen models.
Estimation of these models is carried out over a sample period starting no earlier than 2003m5 and
running up to 2012m6. In addition to omitting the aforementioned outlier, the lower bound of each
estimate was selected so that all models are estimated on the same number of observations; this is
imperative, as it is under these conditions that the Akaike Information Criterion (AIC) and Schwartz
Bayesian Criterion (SBC) allow us to compare the goodness of fit for non-nested models (Enders,
2010:71). The upper bound was selected so as to conserve a sample period (2012m7 to 2014m6, 23
observations in total) for out-of-sample model evaluation.
The set of ARIMA(p,1,q) models are displayed in Table 7.1 and Table 7.2, and the set of ARIMA(p,0,q)
models are displayed in Table 8.1 and Table 8.2. Statistical significance is indicated by asterisks: ***,
**, * indicate statistical significance at the one, five and ten percent level respectively. Notably, the

highest adjusted R-squared (of 0.511053, column 7.9) achieved by the set of ARIMA(p,1,q) models is
less than the lowest adjusted R-squared (of 0.564614, column 8.2) achieved by the set of ARIMA(q,0,1)

Table 7.1: L_SAPU ARIMA(p,1,q) Modes (Specified with a Constant)

7.1
AR(1)
AR(2)
AR(3)
MA(1)
MA(2)
MA(3)
R-Squared
Adjusted R-Squared
AIC
SBC

7.2

-0.442928***

7.3

7.4

-0.563887***
-0.300189***

-0.799862***

7.5

-0.773702***

-0.801019***
-0.179567*

0.505632
0.486799
0.052221
0.174970

0.515960
0.497521
0.031107
0.153856

0.483596
0.458769
0.114011
0.261310

7.12

7.13
-0.749900***

7.14

0.068400
-0.809714***
-0.170669*

-0.085062
-0.651971***

0.518376
0.495221
0.044286
0.191585

0.509577
0.485999
0.062389
0.209688

-0.652691***

0.503519
0.489467
0.038304
0.136503

0.440800
0.419497
0.175446
0.298196

0.503985
0.485089
0.055546
0.178295

7.7
-0.657519***
-0.450292***
-0.264077***

-0.079993

-0.811335***

0.378499
0.360910
0.262895
0.361094

7.6

Table 7.2: L_SAPU ARIMA(p,1,q) Models (Specified with a Constant)

AR(1)
AR(2)
AR(3)
MA(1)
MA(2)
MA(3)
R-Squared
Adjusted R-Squared
AIC
SBC

7.8
-0.689573***
-0.500107***

7.9
-0.759654***

7.10

7.11
-0.133164

-0.412994***

-0.784627***
-0.094265
-0.100864

-0.764419***

-0.738372***
-0.243409***

0.502941
0.479044
0.075830
0.223129

0.533482
0.511053
0.012419
0.159718

0.521552
0.498549
0.037670
0.184969

0.523528
0.500621
0.033530
0.180829

-0.093440
-0.046456
-0.754525***

-0.213780**
0.506587
0.482865
0.068468
0.215767

Table 8.1: L_SAPU ARIMA(p,0,q) Models (Specified with a Constant and a Linear Time Trend)

AR(1)
AR(2)
AR(3)
MA(1)
MA(2)
MA(3)
R-Squared
Adjusted R-Squared
AIC
SBC

8.1
0.281013***

8.2

8.3
0.249483**
0.124413

8.4
0.250299**

8.5
0.190037*

0.242873**

0.576597
0.564614
0.036300
0.134499

0.591906
0.572286
0.035837
0.183136

0.584635
0.568811
0.035316
0.158065

8.7
0.233942**
0.098348
0.112301

0.277499***

0.265961***
0.144951

0.591224
0.575651
0.019326
0.142075

0.586793
0.571052
0.030105
0.152854

0.593339
0.573788
0.032320
0.179619

8.13

8.14

0.092901

0.580671
0.568803
0.026632
0.124831

8.6

Table 8.2: DT(L_SAPU) ARIMA(p,0,q) Models (Specified with a Constant and a Linear Time Trend

AR(1)
AR(2)
AR(3)
MA(1)
MA(2)
MA(3)
R-Squared
Adjusted R-Squared
AIC
SBC

8.8

8.9

0.239662**
0.125431

0.242073**

8.10

8.11

8.12

0.247522**
0.189134*

0.009099

0.262686***
0.146813
0.041488

0.275539***

0.088107
0.039288

0.587568
0.567739
0.046411
0.193710

0.585234
0.565293
0.052054
0.199353

0.587626
0.567800
0.046270
0.193569

0.591246
0.571594
0.037454
0.184753

0.106804
0.261801***
0.152479

0.125459

0.592057
0.572444
0.035468
0.182767

0.592257
0.572653
0.034978
0.182277

0.182591*
0.089720
0.256385**

0.076966

0.006766
0.594761
0.575278
0.028817
0.176116

10

models. This finding corroborates the first element of our hypothesis that models including a linear trend
will fit well in-sample. Note however that adjusted R-squared is not an appropriate criterion for
evaluating the relative goodness of fit for non-nested models (Wooldridge, *****); as mentioned above,
for this purpose we must refer to each models AIC and SBC score. Moreover, it is also necessary to
note that the AIC and SBC cannot be used to rank models between these groups, as they do not allow
for comparison across models with different transformations of the dependent variable (Burnham &
Anderson, 2002:80). Rather, the AIC and he SBC are used here to select the best models from within
each group respectively.
For ease of evaluation, the four lowest (and thus best) AIC and SBC scores among each of the two sets
of models have been colour-coded: light blue is lowest, dark blue is second lowest, light gold is third
lowest, dark gold is fourth lowest. Of the ARIMA(p,1,q) models, the ARIMA(0,1,2) model in column 7.6
scores lowest in both AIC and SBC and is thus the strongest contender of this group; the ARIMA(1,1,2)
model (7.9) is also a strong contender, with the second lowest AIC score and the third lowest SBC
score. For the third ARIMA(p,1,q) contender, the ARIMA(0,1,1) model (7.2) is selected given that it
attains the second lowest SBC score; this statistic is unbiased in small samples (****), and thus 7.2 is
selected not only for the level of its SBC score but also for the reliability of this score vis--vis models
that achieved low AIC scores.
Among the ARIMA(p,0,q) models, the ARIMA(1,0,0) model (8.1) achieves the lowest SBC score and
the second lowest AIC score, and is thus selected. The ARIMA(0,0,1) model (8.2) performs poorly
relative to many of the other ARIMA(p,0,q) models with respects to its AIC score, but is selected on the
basis of its SBC score (which is second-lowest among this group of models). Finally, the ARIMA(1,0,1)
model (8.5), which achieved the lowest AIC score and the third lowest SBC score, is selected.

1.2.3 Forecast Evaluation and Residual Diagnostics

Table 9 presents forecast evaluation statistics for the six models selected above. Let us first consider
the root mean squared error (RMSE), the mean absolute error (MAE) and the mean absolute
percentage error (MAPE). The formulas for these statistics as calculated by EViews (EViews Users
Guide Part II, Basic Data Analysis, 2015) are given as follows:
+

=
=+1

=
=+1

( )2

| |

= 100 |
=+1

| /

[1]

[2]

[3]

11

where the are the forecasted values of series, the are the actual values of the series, is the
number of observations that comprise the forecast period and is the final period of the sample used
for estimation. It can be deduced from the equations above that the RMSE and the MAE are invariant
to additive transformations to { } and { } (the series of and respectively) and are sensitive to
multiplicative transformations thereof;

12

Table 9: Forecast Evaluation Statistics

7.2

7.6

7.9

8.1

8.2

8.5

Root Mean Squared Error

0,233025

0,233939

0,232661

0,227842

0,222692

0,241225

Mean Absolute Error

0,174137

0,177961

0,175856

0,176699

0,170752

0,188668

Mean Abs, Percent Error

81,88688

114,4257

119,8167

3,423309

3,303542

3,657336

Theil Inequality Coefficient (UI)

0,490039

0,478561

0,497255

0,021892

0,02141

0,023171

Bias Proportion

0,038518

0,045005

0,006261

0,013418

0,021025

0,009302

Variance Proportion

0,179617

0,135159

0,191533

0,467837

0,513652

0,379572

Covariance Proportion

0,781866

0,819836

0,802206

0,518745

0,465323

0,611126

0,819317

0,822532

0,818037

0,043657

0,042670

0,046221

7.2

7.6

7.9

8.1

8.2

8.5

Jarque-Bera Statistic

1,131019

0,703254

0,676746

0,980092

0,926902

0,667017

Prob,

0,568071

0,703542

0,712929

0,612598

0,629109

0,716406

0,471431

1,804706

0,406063

1,26157

2,001406

0,996703

0,7566

0,1337

0,8039

0,29

0,0999

0,413

1,956233

6,898901

1,59509

5,185523

8,004894

4,176669

0,7438

0,1413

0,8097

0,2688

0,0914

0,3826

0,105423

0,067843

0,157677

0,087633

0,055419

0,204926

0,746

0,795

0,6921

0,7678

0,8143

0,6517

0,107288

0,069067

0,160388

0,089198

0,056425

0,208357

0,7433

0,7927

0,6888

0,7652

0,8122

0,6481

Theil Inequality Coefficient (UII)

Table 10: Residual Diagnostics

Jarque-Bera Test for Normality

Breusch-Godfry Serial Correlation Test, 4 Lags

F-statistic
Prob.
Obs*R-squared
Prob.
ARCH Heteroskedasticity Test, One Lag
F-statistic
Prob.
Obs*R-squared
Prob.

13

the opposite is true of the MAPE. However, none of these three statistics are comparable across
difference transformations of the dependent variable, as the series { } and { } do not generally
contain the same forecastable information (*****).

14

Section 2: Robustness Check

As a robustness check, McLean (2015) evaluates the relationship between the L_SAPU index and
L_SAVI (the log of the South African Volatility Index) over the period 2007m7 to 2012m11. The results
found here were mixed. Correlation between L_SAVI and L_SAPU was found to be negligible at 0.013,
but was also found to be much higher for the first differences of these series (0.177); this finding
suggests that there is non-negligible correlation between the changes in these indices (Mclean,
2015:14-15). Less positively, a simple regression of the L_SAVI on L_SAPU did not produce a
statistically significant coefficient, a result that is probably partially a product of the small sample of 65
observations used in these estimates, but which nevertheless bodes ill as a reflection of the robustness
of the index (McLean, 2015: 15).
In light of the opacity of this previous investigation, this section adds to McLeans (2015) robustness
checks with an examination of the relationship between SAPU and an index (administered by the BER
(Bureau for Economic Research) and obtained from Quantecs Easy Data (2015) database) which
tracks the percentage of a representative sample of manufacturing firms that cite the current political
climate as a constraint on production. This index is denoted here as MSPC.
Thinking about the data generating process underlying both of these indices leads to two testable
hypotheses. Firstly, the theoretical and empirical literature documenting the effects of policy uncertainty
on production suggest that policy uncertainty constrains production by increasing the option value of
future investment (Rodrik, 1991); thus, one would expect SAPU and MSPC to be positively correlated
and possibly cointegrated. Secondly, SAPU is arguably a direct measure of policy uncertainty, while
MSPC is a variable that should respond to policy uncertainty; thus one would expect SAPU to be weakly
exogenous with respects to MSPC.

2.1 Pretesting
Table 12 shows the ADF critical and test statistics for a variety of transformations on MSPC and under
a variety of specifications, broken into sample periods that correspond with the data availability of
SAPU. As indicated in 12.1 and 12.2 respectively, ADF tests conducted over the full sample, specified
with a constant or a constant and a deterministic trend, produce test statistics that are too high to reject
the hypothesis of a unit root; high p-values of 0.5963 and 0.8504 respectively make this rejection
uncontentious. Furthermore, under 12.3 it can be seen that for the first difference of MSPC (D_MSPC)
the hypothesis of a unit root can be rejected at the one percent level of significance; hence we can
conclude from these full sample tests that MSPC is difference stationary (i.e. is I(1)). With reference to
12.10, 12.11 and 12.12, the same conclusion may be drawn with regards to the log of MSPC (L_MSPC)
and for the first difference of the log of MSPC (DL_MSPC).
When MSPC is examined in sections corresponding the data availability of SAPU, tests for the level of
integration of the series produce results similar to those reported in Section 1 for SAPU in the
corresponding sample periods: For the period 1994Q1 to 2001Q4, MSPC and L_MSPC tests as I(0);

15

Table 12: ADF tests MSPC

1994Q1 to 2014Q2

1994Q1 to 2001Q4

2003Q1 to 2014Q2

12.1

12.2

12.3

12.4

12.5

12.6

12.7

12.8

12.9

MSPC

MSPC

D(MSPC)

MSPC

MSPC

D(MSPC)

MSPC

MSPC

D(MSPC)

-1.363019

-1.411030

-13.40636

-5.061119

-5.382322

-9.542237

-0.944454

-3.641963

-9.035099

1% level

-3.514426

-4.076860

-3.514426

-3.661661

-4.284580

-3.670170

-3.581152

-4.170583

-3.581152

5% level

-2.898145

-3.466966

-2.898145

-2.960411

-3.562882

-2.963972

-2.926622

-3.510740

-2.926622

10 % level

-2.586351

-3.160198

-2.586351

-2.619160

-3.215267

-2.621007

-2.601424

-3.185512

-2.601424

0.5963

0.8504

0.0001

0.0003

0.0007

0.0000

0.7649

0.0371

0.0000

Constant

Constant

Constant

Constant

Constant

Constant

Constant

Constant

Constant

Dependent Variable
t-Statistic
ADF Test critical values:

Prob.*
Exogenous:

Trend

Trend

Trend

12.10

12.11

12.13

12.14

12.15

12.16

12.17

12.8

12.9

Dependent Variable

L_MSPC

L_MSPC

D(L_MSPC)

L_MSPC

L_MSPC

D(L_MSPC)

L_MSPC

L_MSPC

D(L_MSPC)

t-Statistic

-2.313132

-2.312348

-12.56348

-4.813128

-5.105216

-9.568363

-0.992759

-3.538037

-8.323042

1% level

-3.513344

-4.075340

-3.514426

-3.661661

-4.284580

-3.670170

-3.581152

-4.170583

-3.581152

5% level

-2.897678

-3.466248

-2.898145

-2.960411

-3.562882

-2.963972

-2.926622

-3.510740

-2.926622

10 % level

-2.586103

-3.159780

-2.586351

-2.619160

-3.215267

-2.621007

-2.601424

-3.185512

-2.601424

0.1704

0.4224

0.0001

0.0005

0.0013

0.0000

0.7482

0.0470

0.0000

Constant

Constant

Constant

Constant

Constant

Constant

Constant

Constant

Constant

ADF Test critical values:

Prob.*
Exogenous:

Trend

Trend

Trend

16

Table 13: ADF Tests SAPU (Quarterly)

1994Q1 to 2001Q4

2003Q1 to 2014Q2

13.1

13.2

13.3

13.4

13.5

13.6

SAPU

SAPU

D(SAPU)

SAPU

SAPU

D(SAPU)

-2.592892

-3.791835

-5.627037

-2.424996

-3.959771

-8.359628

1% level

-3.689194

-4.323979

-3.711457

-3.581152

-4.170583

-3.581152

5% level

-2.971853

-3.580623

-2.981038

-2.926622

-3.510740

-2.926622

10 % level

-2.625121

-3.225334

-2.629906

-2.601424

-3.185512

-2.601424

0.1063

0.0323

0.0001

0.1407

0.0172

0.0000

Constant

Constant

Constant

Constant

Constant

Constant

Dependent Variable
t-Statistic
ADF Test critical values:

Prob.*

Exogenous:

Trend

Trend

13.7

13.8

13.9

13.10

13.11

13.12

L_SAPU

L_SAPU

D(L_SAPU)

L_SAPU

L_SAPU

D(L_SAPU)

-2.432925

-5.319496

-4.917714

-1.313868

-3.931164

-9.590602

1% level

-3.661661

-4.394309

-3.752946

-3.588509

-4.175640

-3.588509

5% level

-2.960411

-3.612199

-2.998064

-2.929734

-3.513075

-2.929734

10 % level

-2.619160

-3.243079

-2.638752

-2.603064

-3.186854

-2.603064

0.1414

0.0013

0.0007

0.6149

0.0186

0.0000

Constant

Constant

Constant

Constant

Constant

Constant

Dependent Variable
t-Statistic
ADF Test critical values:

Prob.*
Exogenous

Trend

Trend

for the period 2003Q1 to 2014Q2, MSPC and L_MSPC test as trend stationary at the five percent level
of significance.
Table 13 shows the results of a similarly implemented battery of ADF tests for a variety of
transformations of SAPU; as in Section 1, full sample tests are omitted here due to the discontinuity in
the data from 2002Q1 to 2002Q4. For the period 2003Q1 to 2014Q2 the results in Table 13 are similar
to those presented in Section 1: 13.4 and 13.10 indicate that we cannot reject the hypothesis that SAPU
and L_SAPU are nonstationary, while the rejection of the hypothesis in 13.5 and 13.11 suggest that the
data is trend stationary. For 1994Q1 to 2001Q4, the results obtained for SAPU differ importantly from
those obtained for the series monthly counterpart: for this period and at this data frequency, the
hypothesis that the series is non-stationary cannot be rejected at the ten percent level for SAPU and
L_SAPU; the rejection of the null hypothesis obtained in 13.2 and 13.5 thus suggest that this portion of
the series is trend stationary.

17

2.2 Correlations
Though it is not robust to sources of endogeneity, the correlation structure between variables can
provide valuable insight regarding the relationship between them. Table 14 displays the correlation
coefficients for the SAPU and MSPC in levels, first differences, log levels and for the first differences of
the log levels of these series. Columns corresponds to lags, leads or contemporaneous value of SAPU
or its transformation (the relevant transformation of SAPU and MSPC for each row is indicated in the
left hand column); a positive (negative) number indicates that the reported correlation is between MSPC
and a lead (lag) of SAPU (or transformations thereof). For convenience, positive correlations are
highlighted in yellow, negative correlations are highlighted in blue.
As can be seen in Table 14 below, correlation between MSPC and SAPU for the period 1994Q1 to
2001Q4 (14.1) is positive for contemporaneous values of SAPU, as well as for its first and second lag.
Leads of SAPU are found to be negatively correlated with MSPC, but these correlations are of a
negligible magnitude. This correlation structure is consistent with the above-stated hypotheses that
SAPU and MSPC should be positively correlated and that SAPU should be seen to drive the variation
in MSPC. However, this result is somewhat reversed for L_MSPC and L_SAPU: here, leads of L_SAPU
are found to be positively correlated with L_MSPC, and lags of L_SAPU are negligibly negatively
correlated with L_MSPC, suggesting that it is L_MSPC that drives L_SAPU. Furthermore, for D(MSPC)
Table 14: Correlations for Leads and Lags of SAPU

14.1: 1994Q1 to 2001Q4

+2

+1

-1

-2

MSPC and SAPU

-0,0073

-0,0141

0,1821

0,2347

0,2393

D(MSPC) and D(SAPU)

0,1435

-0,1465

0,1907

0,0236

0,0526

L_MSPC and L_SAPU

0,3056

0,2607

0,2506

-0,0400

-0,0789

D(L_MSPC) and D(L_SAPU)

-0,0014

-0,1424

0,2917

-0,0257

0,1232

+2

+1

-1

-2

MSPC and SAPU

0,7687

0,8255

0,8853

0,9050

0,8844

D(MSPC) and D(SAPU)

-0,1361

-0,0691

0,2428

0,1166

0,0842

L_MSPC and L_SAPU

0,7987

0,8424

0,8771

0,8817

0,8661

D(L_MSPC) and D(L_SAPU)

0,0527

0,0230

0,2459

-0,0380

-0,1001

14.2: 2003Q1 to 2014Q2

18

and D(SAPU) and for D(L_MSPC) and

Figure 9: L_SAPU and L_MSPC 1994Q1 to 2014Q2

D(L_SAPU), the correlation structure for lags

and leads of SAPU breaks down into obscure
patterns. However, there remains the positive

finding that for all transformations of the data

SAPU and MSPC are contemporaneously

positively correlated; this is the least one

3

would expect if these two series contain

information derived from the same underlying

2
94

96

98

00

source.

02

04

06

L_SAPU

08

10

12

14

L_MSPC

Referring now to 14.2, the correlation structure

between SAPU and MSPC is very pronounced

Figure 10: L_SAPU and L_MSPC 1994Q1 to 2001Q4 (Demeaned)

in the period 2003Q1 TO 2014Q2, with

0.8

positive correlations ranging from a low of

0.4

0,7687 at two leads of SAPU, up to a high of

0.0

0,9050 at one lag of SAPU; similarly

-0.4

pronounced correlations are also evident for

-0.8

L_SAPU and L_MSPC. Little of a conclusive

-1.2

nature can be drawn from this association

-1.6
1994

1995

1996

given the indications of nonstationarity that

1997

1998

L_SAPU

1999

2000

2001

L_MSPC

characterize this section of the data (as

discussed in Section 2.1), but nevertheless
this result is very encouraging. To put this
finding into perspective, Baker, Bloom and

Figure 11: L_SAPU and L_MSPC 2003Q1 to 2014Q2 (Demeaned)

0.8

0.4

Davis (2013:18), in checking the robustness of

0.0

their United States policy uncertainty index

(USPU), found that the VIX and USPU shared

-0.4

a contemporaneous correlation of 0.578. For

-0.8

a more direct check of the efficacy of their

-1.2
03

methodology,

Baker,

Bloom

and

04

05

06

Davis

07

08

L_SAPU

09

10

11

12

13

14

L_MSPC

(2013:18) also construct a news-based equity

market uncertainty (EMU) index and find that it exhibits a contemporaneous correlation of 0.733 with
the VIX. Though Baker, Bloom and Davis (2013) do not report on the stationarity of these series, a
visual inspection of them (see Baker, Bloom and Davis (2013:46)) suggests that they are also
nonstationary. Given this context, the findings presented here, which indicate a greater
contemporaneous correlation between SAPU (L_SAPU) and MSPC (L_MSPC) than was found
between the VIX and Baker, Bloom and Davis (2013) EMU index, should be regarded as strong
evidence of the reliability of SAPU as a measure of policy uncertainty.

19

20

21

References
Bonate, P. 2006 Pharmacokinetic-Pharmacodynamic Modeling and Simulation. New York: Springer
Science & Business Media, Inc.
Burnham, K.P. & Anderson, D.R. 2002. Model Selection and Multimodel Inference: A Practical
Information-Theoretic Approach. New York: Springer Inc.

22