Questions tagged [ecm]

Error Correction Model

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Time series ARDL-model interpretation

Anyone knows how the interpretation of these ARDL models? Bounds test & ECT are easy to interpretation. But I want to say something about the short run and long run effects of variables. Long ...
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19 views

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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22 views

How to Test the Dynamic Stability of an ARDL Model

1) I have an ARDL model(1,2,3). How can I test whether it is dynamically stable and the inverse roots are inside the unit circle? Prof. David Giles suggested a trick to do so in Eviews a simple AR ...
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1answer
17 views

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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1answer
38 views

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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20 views

I have I(1) dependent, two I(0) and one I(2) independent variables, which model I have to use?

I want inflation forecast. I have I(1) dependent, two I(0) and one I(2) independent variables, how can I check co-integration and which model I have to use? I was about to use ARDL or ECM model, but ...
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35 views

what are the effects of a permanent shock to an cointegrated series in both the short and long run?

I have estimated an error correction model between two series that are co-integrated with an error correction term of -0.9057 and I need to discuss the effects of a permanent shock to my dependent ...
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1answer
33 views

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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48 views

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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29 views

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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48 views

Chow test results interpretation

I am analysing time series data right now using gretl, and want to test for a structural break, but I am not quite sure how I have to interpret the results. Let's say I have a wheat price and flour ...
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56 views

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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64 views

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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11 views

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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25 views

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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61 views

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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33 views

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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315 views

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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36 views

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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158 views

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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195 views

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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215 views

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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1answer
64 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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2k views

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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1answer
49 views

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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2answers
53 views

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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245 views

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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1answer
410 views

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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152 views

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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1answer
1k views

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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58 views

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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1answer
2k 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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79 views

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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183 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 ...
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1answer
749 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 ...
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1answer
2k 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 ...
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1answer
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 ...
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1k 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 ...
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1answer
497 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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91 views

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 ...
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1answer
574 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 ...
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1answer
1k views

Econometrics - Relationship between cointegration and ECM

I'm pretty new to econometrics and I've been taking a class at university which uses the book "Econometric theory and methods" by Davidson and MacKinnon. It's a pretty good book but there's one thing ...
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1answer
959 views

Analysis after Gregory-Hansen cointegration test

I have two time series which fail E-G cointegration test over the whole sample, but G-H cointegration test indicates the presence of cointegration when regime shift is allowed. Can I set up a dummy ...
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5k views

How to estimate Error Correction Model in Eviews?

I am using time series data of six metal prices (in real terms) to estimate its trend over the last 55 years. for that i am using a modified quadratic model which integrates an error correction term. ...
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2answers
6k views

ARDL/Error Correction Model: long vs. short run, restricted vs. unrestricted

I have a few questions about unrestricted error correction models. The UECM for a model where $Y$ is the dependent variable and $x$ is the sole independent variable is given by $$ \Delta Y_{t}=\...
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4k views

Help understanding how the cointegration equation for VECM models are derived

I am learning about Vector Error Correction Models from Sean Becketti's "Introduction to Time Series using Stata". While I know how to run the Stata commands to estimate the VECM, I have no idea why ...
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1answer
139 views

Is it appropriate to run the Error Correction Model on data which are not I(1)?

I have intraday data (frequency = 1 min.) for 6 stocks and 1950 observations per each time series. I checked stationarity for the level data and first difference and it appears that: 5 stocks's ...
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1answer
693 views

Error correction model (to test for asymmetry) with stationary I(0) variables

I have price series which are all stationary without taking any difference --> I(0). Can I still perform an ECM model to test for asymmetry? For example: Y= constant X; taking the residuals and ...
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1answer
901 views

Error Correction Model & Trend Stationarity

I'm familiar with a traditional Error Correction Model (ECM) of the form $$Y_{t}-Y_{t-1}=\Pi Y_{t-1}+\sum_{i=1}^{p-1}\Gamma_{i}\left(Y_{t-i}-Y_{t-i-1}\right)+\varepsilon_{t} $$ where $\Pi=\alpha\beta'...