I am studying ECM alone using a book and some parts are not explained.
First, the book advise to test for a unit and for the order of integration of the series. In eviews options are not pretty clear to me :
- What is the difference between level, 1st difference and 2nd difference in the ADF Unit root test ?
Running the test (ADF and intercept) I conclude that my series is not stationary :
Null Hypothesis: LTD_P51S_DHFZ7_CH has a unit root Exogenous: Constant Lag Length: 1 (Automatic - based on SIC, maxlag=13) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -0.874719 0.7939 Test critical values: 1% level -3.475500 5% level -2.881260 10% level -2.577365 *MacKinnon (1996) one-sided p-values.
But when using Trend & Intercept it is not very clear that it is not stationnary :
Null Hypothesis: LTD_P51S_DHFZ7_CH has a unit root Exogenous: Constant, Linear Trend Lag Length: 2 (Automatic - based on SIC, maxlag=13) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -2.811152 0.1957 Test critical values: 1% level -4.022586 5% level -3.441111 10% level -3.145082 *MacKinnon (1996) one-sided p-values.
Which test should I use ? Intercept ? Trend ? None ?
Also how to test it's order of integration ? I(1), I(2) etc.
Also when you have multiple variables (more than two) in you long term static equation, it is possible that some variable are cointegrated two by two and that you need to run a VECM (from what I have understood).
To test for that I read that you can make a Johansen System Cointegration but I really do not understand all the options (Intercept, trend ; in CE, in VAR etc.) and what they imply, I tried multiple but the results differ greatly.