A VAR with five variables, 4 lags and constant terms for each equation will have a total of
A)21 coefficients.
B)100 coefficients.
C)105 coefficients.
D)84 coefficients.

Question

Quizplus · Accepted Answer

For each equation, we will have 4 lags and a constant term, which makes a total of 5 coefficients. Since we have 5 variables, we will have a system of 5 equations. Therefore, the total number of coefficients will be:

5 equations * (4 lags + 1 constant term) = 5 * 5 = 25

However, since we have 5 variables, and each equation will have its own set of coefficients, we need to multiply 25 by 5:

25 * 5 = 125

But, since we have 4 lags, we need to subtract 4 coefficients from each equation (since we won't have lags for the first 4 time periods), so the total number of coefficients will be:

125 - (4 * 5 * 5) = 125 - 100 = 25

Therefore, the answer is C).

A VAR with Five Variables, 4 Lags and Constant Terms