# Questions tagged [ecm]

Error Correction Model

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### Seasonality in ECM: Controlling Within the Model (e.g., Adding Dummies) vs. Outside the Model (e.g., Seasonal Adjustment)

When running an Error Correction Model (ECM) with seasonal data, two main strategies are typically considered (for example here and here): Incorporating seasonal dummies within the model to control ...
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### Interpret $R^2$ for a long-run equilibrium model (2 stage OLS)

I've built an error correction model using two stage OLS - first an OLS on the cointegrated I(1) variables in levels to get the cointegration coefficients, and then an ARDL in differences with the ...
1 vote
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### ECM Specification of ARDL model

I have a question regarding the model reparametrization of an ARDL model. Consider the following ARDL$(p,q,q,\ldots,q)$ model: y_{it} = \alpha_i + \sum_{j=1}^{p} \lambda_{ij} y_{i,t-j}...
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### Insignificant variable in Error Correction Model

While working with ECM model short-term and long-term models, I have identified certain variables that appear to be statistically insignificant (P value > 0.05). Is it acceptable to have some ...
1 vote
24 views

### "Inverting back" the inverted supply equation in an ECM. Possible?

I am estimating a time series 2SLS, ECM model, for electricity consumption. The system has a demand equation: The price is endogenous in the demand equation, and therefore, I also estimate a price ...
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89 views

### Accelerate the fitting of an ECM-GARCH model by computing MLE gradient numerically?

I'm trying to fit an ECM model with variance following a GARCH-DCC model (GARCH with dynamic cross correlation). It has 16 parameters for 2 assets (ECM : 4 gammas, 2 lambda, GARCH: 2 alphas, 2 beta, 2 ...
1 vote
47 views

### VECM and cointegration rank: What is an intuitive explanation?

I'm trying to understand what is the meaning of having a k x k parameter matrix for the long term (cointegration) relationship in a VECM model, and a rank ...
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### ECM long-run elasticity with one I(2) variable

I am estimating a 2SLS using a time series simultaneous equation ECM. The purpose is to estimate the price elasticity of electricity demand. Assume that both price and demand are I(1) variables, ...
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176 views

### Johansen cointegration test for ECM model

I'm dealing with the Johansen cointegration test before running an ECM model. I cannot figure out which type of test execute: with/without constant, with/without trend, ... How can I choose the ...
354 views

### Error Correction model and vector error correction model and their error correction terms

(1) What is the difference between these two ina bivariate variable? I know that VECM caters to more than one cointegrating vectors but equation wise what is difference between these two? Both uses ...
1 vote
469 views

### Negative coefficient on the error correction term in an ECM

Why should $\beta_2$ in the error correction model, $(Y_t – Y_{t−1}) = \beta_0 + \beta_1(X_{t−1} – X_{t−2}) + \beta_2(Y_{t−1} + (–\beta_3)X_{t−1}) + u_t$, be negative? I cannot locate any clear ...
2k views

### What is the difference between ECM and VECM?

From what I understood, ECM is for two variables and apply OLS to estimate EC term and VECM is for multi-variables (vector form) and apply VAR to estimate EC term. But as I read other papers, I think ...
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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 ...
1 vote
746 views

### Seasonality and ECM - Correct seasonality before estimating ECM

I know that for univariate framework, a typical process to deal with seasonality is : detect correct (for instance, withdraw seasonal factors) forecast re-seasonalize the forecasted series (for ...
1 vote
186 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 ...
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1 vote
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### 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 ...
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### 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 ...
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188 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 ...
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1 vote
1k 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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1 vote
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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?
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