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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 ...
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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: \begin{equation} 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 ...
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"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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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 ...
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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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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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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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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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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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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Getting understand error correction model

I have several intuitive problems with error correction model. I will write below how I understand derivation of ECM model with my queries. Let $I(y_t)=I(X_t)=1$ and consider model : $$y_t=\alpha_0+\...
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Good resource on ECMs/VECMs?

I am trying to understand ECMs and VECMs and what the relationship between a regression model with stationary residuals or time series errors. Is there a good website/book that goes into the ...
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positive Error correction term, what could be wrong

here is the basic regression: log(Robots per capita)~share of midage+share of older+log(gdp) I obtain good results but all my variables are unit root. So I tried correcting this doing the following. (...
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Cointegration in error correction model with only one nonstationary variable

I have three time series variables, two variables are stationary and one is non-stationary. Can we still search for the cointegration and use the error correction model or should I take the first ...
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Can an ECM be built such that new regressors enter in Stage 2?

If I have an ECM such that there are 2 cointegrated variables, $Z_t\sim I(1)$, $X_t\sim (1)$, and the equation in levels is $Z_t=a+bX_t+e_t$, $e_t\sim I(0)$, can I add other regressors to the 2nd ...
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Interpretation of ECM coefficients

Say that we are regressing consumption $C_t$ on time $Y_t$. Furthermore, suppose that both series are $I(1)$ and are co-integrated. Given this, we set up the error correction model (ECM) as follows: $...
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Queries on Interpretation of Vector Error Correction Model

I am trying to understand the Vector Error Correction (VEC) Model properly. I have been trying to read from several sites, went through the Chapter in Chris Brooks. But with different sources, the ...
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Cointegration, Error Correction, and ADF test with lags

I am fitting an error correction model (ECM) of two I(1) variables. I'm following the Engle-Granger approach of first finding the cointegrating relationship. So first, I regress one series against the ...
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Eviews- Error correction estimation using BDM's one-step procedure

I am trying to estimate an equation for the average wage using quarterly data. I want to build an ECM which can bes estimated using Banerjee-Dolado-Mestre's approach to cointegration. So far, I haven'...
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Error Correction Model (ECM) procedure

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....
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Difference of Rates in ECM

I am setting up a model to predict something using Error Correction Model (see pic. to get a general view about the model itself). Some of my $X$ variables are the interest spread between the A and B ...
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Can I treat the sum of the coefficients of a variable in the Error Correction Model as total short-run effects?

I am working on a project that uses ECM model to inspect the short-run dynamics of money supply (m(t)) to loans (l(t)) since both variables are I(1). Excluding the error correction term, is it ...
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Cointegration: comparing IRF for the univariate ECT, versus for the multivariate VECM?

Assume we have $k$ I(1) variables, cointegrated of rank $r = 1$. By cointegration, I know that the error-correction term (ECT) is itself a I(0) univariate process. Assume now I am interested in the ...
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Distribution of coefficient on the error correction term in ECM and VECM

According to statistic academic literature, the cointegration test on coefficient $\alpha$ of the error term included in ECM or VECM does not follow a standard distribution. My question is: If so, ...
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How to deal with seasonality in cointegration analysis?

I have two time series of daily gasoline prices (1500 observations each) which I suspect to be cointegrated. I aim to find an ECM/Asymmetric ECM/Threshold ECM to investigate possible asymmetries. My ...
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ECM with different representations

By construction ECM (Error Correction Model) is represented by the following equation: $$\Delta Y_{t}=\psi_{1} \Delta X_{t}-(1-\theta)[Y_{t-1}-\alpha-\beta X_{t-1}]+\epsilon_{t} \ \ \ \ \ \ \ \ ...
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Engle Granger Error Correction Model - Normality, heteroskedasticity and Autocorrelation tests

I'm building an Error Correction Model using the Engle-Granger approach with the following interest rates data: Observations: 230 Periodicity: Monthly I have the following model: $$\Delta R_t = \...
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Interaction term in error correction model using

I am having difficulty understanding how to insert an interaction term into my error correction model. I have a panel data across 30 countries over 15 years. I know that the basic error correction ...
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VECM in matrix form - explanation

I am wondering if someone can help me with explaining some variables in that VECM equation in a matrix form and checking if my previous assumptions are right about the parameters. So $\varphi$ in ...
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1 answer
177 views

Calculating, and plotting, long run effects of dynamic panel models

I am estimating an error correction model of the following form, using panel data where $i$ are countries and $t$ are years: $\Delta y_{it} = \alpha + \phi_1 y_{it-1} + \phi_2 y_{it-2} + \gamma x_{it-...
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Using a ECM/VECM or ARDL model? Why and How?

I have a couple of question regarding the use ECM/VECM and Johansen test for cointegration.  In my model (6 variables), I have only one variable that is Stationary in its level, the remaining five ...
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How to rearrange formula - Error correction models

I am studying a time series subject but I am really struggling with the maths. Could someone please help me get from the first equation to the second equation? Apparently it has been reparameterised ...
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2 answers
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Is there any reason why one cannot create a time series from variables calculated from regressions on cross sections?

I am asking this question as the textbooks that I have don't specifically address the topic of creating a time series. If you have an answer, or even links to articles that I can research myself, it ...
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confusion about error correction model

I came across the following model in an internal paper: $∆y_t=\beta (\mu-y_{t-1} ) +\kappa(x_{t} -\alpha y_{t-1} ) +\epsilon_t$........................(1) In this the first part : $\beta(\mu-y_{t-...
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Contemporaneous regressors in the Error-correction Mechanism

I am estimating an Error Correction Model using the two step approach. In the usual form the ECM second-step regression includes lagged first differences of independent variables $X_{1}, ..., X_{k}$ ...
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ECM with fixed effects in a long-run equation

I would like to make a simple estimate of regional GDP. Predicted values of GDP on country level are available, so I was thinking about using these values and create a simple model. Simple linear ...
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Autocorrelated residuals in ARDL and/or ECM

When there is an issue of autocorrelation in an ARDL or ECM model, are we allowed to use AR(1) to correct for the problem? What is the difference between ARDL model and ECM model?
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Error Correction Model for p=1?

When building an Error Correction Model, is there any point in keeping p=1? I see a lot of equations where there t is influenced not only by t-1 but also t-2. If I only have t-1, is it useful at all ...
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3 votes
1 answer
5k views

Interpretation of the Error Correction Term as time to correct

I have the following question that I haven't managed to find a satisfying answer. In an Error Correction Model (assuming that all its assumptions hold): $$\Delta y_{t} = a + b(y_{t-1}-\hat c-\hat kx_{...
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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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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 ...
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