I am fitting an Error Correction Model with two monthly price time series.
In Stata I am using the varsoc
command to determine the number of lags that are appropriate.
varsoc variable1 variable2
If I run varsoc
with the default 4 maxlags
, the suggested lag length using AIC/FPE is 3.
However, if I run varsoc with maxlag(12)
option, 12 lags are suggested.
If I use maxlag(20)
, 13 lags are suggested.
- Why is
varsoc
so sensitive to the number ofmaxlag
? - If this is the case, how should I decide which
maxlag
to use? Runningvarsoc
on the time series seperately yields 8 lags (if a largermaxlag
is chosen).