# Questions tagged [ecm]

Error Correction Model

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### Help needed with ARDL Bounds Approach

I hope you are doing ok amidst this global pandemic. I'm currently working on this research using the ARDL Bounds approach. My (to a degree self-imposed) "task" is to study the relationship ...
16 views

### Derive Error Correction model

How can I derive The extended version of ECM as follows $$\Delta y_t= \sum_i^{p} \Delta \alpha_i y_{t-i} +\sum_i^q \beta_i \Delta x_{t-i}+\gamma u_{t-1}+e_t$$ I know that ECM can be derived by using ...
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### Intercept in 2nd-stage Error Correction Model (ECM) regression -- yes or no?

When doing a two-step ECM regression, do we add an intercept in the 2nd stage regression? I've seen course notes that add an intercept in the ECM, but some do not, so I'm confused if I should include ...
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### Why is the error correction term equal to the lagged dependent variable in ARDL unrestricted error correction?

Why is the error correction term equal to the lagged dependent variable in ARDL unrestricted error correction? I´m very poor at algebra, so try to explain as simply as possible thanks.
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### Does the probability of detecting cointegration increase as more collinear variables are considered?

I am scanning for a cointegrating relationship between the asset value of a portfolio and macroeconomic factors. The engle-granger test produces very few significant results when testing for ...
60 views

### Interpretation of intercept term in ECM

Suppose two $I(1)$ series $x_t, y_t$ are cointegrated. Therefore $\mu_t$ in following equation is stationary: \begin{align} y_t = \beta_0 + \beta_1x_t + \mu_t \tag{1} \end{align} Now consider the ECM ...
284 views

### Does Normality of a Time Series imply Stationarity and Viceversa?

I have a theory question which never became completely clear to me. Reading Hamilton (1995) I understod that the stationarity requirement for time series data stands as the normality requirement for ...
35 views

### Cointegration: Long vs Short Run

I am running an ECM model that has one cointegrating vector but two stochastic trends within the cointegration vector ex.(1, -1, 1). Can I use the cointegration vector inside an error correction model ...
38 views

### Bivariate cointegration in a multiple regression error correction model

I am new to cointegration and ECM. I have two I(1) variables that I have estimated and their linear combination is I(0) as per the Engle-Granger test. Is it then possible to use this error-correcting ...
506 views

### What is the difference between ECM and VECM and when to chose one over the other?

I hope you can help me concerning the following question. It is mainly about when to use ECM or VECM. Suppose i have two time series of daily stock prices from Company Y and X and regression a ...
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### Level variables along with differenced variables in ARDL / Error Correctional Model

I am running an ARDL model, I have both levels and difference variables. I know for sure that the difference variables should be included in the ECM but should I include the level variables as well?
216 views

### Panel: Estimating cointegrating vector within ECM to test cointegration

In time-series analysis we were taught that one can test for cointegration by estimating an error correction model and testing whether the coefficient estimated to the deviation of the equilibrium ...
1k views

### Does using difference transformation lead to bias? (Levels vs differences regression)

Consider the model estimated in levels (also assume this is the true population model): $$y_t = x_t\beta + e_t$$ As usual we have the dependent variable $y$, independent $x$, the error term $e$, and ...
3k views

### Sign of adjustment coefficient of error correction term in VECM

I am modelling the relationship between stock prices and 6 macroeconomic variables using Vector Error Correction Model(VECM). It turns out that 6 out of seven adjustment coefficient are positive. Does ...
1k views

### Long-run elasticities in an ECM estimation

I am reading a paper (Stockhammer, Onaran and Ederer, 2011) which estimates the effects of GDP, profits and the interest rate on investment in an ECM form. I am quoting the relevant part of it: The ...
2k views

### Lag order selection in error correction model (ECM)

I am building an Error Correction Model for monthly price data ($X, Y, Z$). I am deliberately using an ECM and not VECM and apply a two step approach (estimating cointegration relationship first, then ...
606 views

### Questions about cointegration and error correction model

I am confused about cointegration and error correction model. I gather that, if two variables are cointegrated, they are related. Is the condition for two variables $X_t\sim~I(a)$,$Y_t\sim I(b)$ to ...
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### Visualising ECM model

I'm presenting an error correction model to a somewhat non-technical audience and want to make as much of the presentation as possible visual. Does anyone have any tips or hints that could be ...
633 views

### Estimation of a VECM model

I am attending a time series econometrics course and I am working on VECM models. We have learnt that to estimate a VECM model we should use Engle-Granger two-step procedure but I have not understood ...