I am getting familiar with ECM so I would like to ask for help in order to understand it. My goal is: performing a ECM in a multivariate context.
I was reading ECM is part of a Cointegration analisis. This Cointegration follows two main steps:
- Estimate a long term equilibrium (using levels or log_price), then
- Perform ECM (using returns).
I also read that before performing the first step I need to verify if the variables (using levels) are following a unit root process. In case they don´t, their difference needs to be verified.
My questions are:
- Am I missing something in the procedure?
- let´s suppose I find all varibles are integrated order two
I(2)expect one which is
I(1). Should I use it for the long term equilibrium (step 1)? How to use this information (
I(2)) in the Cointegration procedure (maybe it needs to be excluded)?
- Can I use some variables for step one, and add some others for the ECM? If yes, what should I need to consider (e.g. do I need to perform more unit root test over those new variables?)
Thx a lot.