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:

  1. Estimate a long term equilibrium (using levels or log_price), then
  2. 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.

  • $\begingroup$ Are you estimating ECM in a bivariate context or do you have more than two variables? $\endgroup$ – dlnB Mar 18 at 22:05
  • $\begingroup$ @dlnB multivariate $\endgroup$ – Newbie Mar 18 at 22:28
  • $\begingroup$ For cointegration, all variables must be $I(1)$. $\endgroup$ – dlnB Mar 18 at 22:30

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