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Questions tagged [vecm]

VECM stands for Vector Error Correction Model. It is used with cointegrated time series and panel data in finance and macroeconometrics. VECM offers a convenient representation of a cointegrated VAR model as it distinguishes between short-run and long-run (equilibrium) effects.

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Granger representation theorem - reverse always true?

The Granger representation theorem claims that a vector error correction model can be transformed into a "common trend representation" (processes share the same stochastic trend) if some criteria are ...
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Deriving the Cointegrating Equation in a VECM model

I am teaching myself econometrics and I am having trouble understanding how the cointegrating equation in VECM is derived. Lets say we have two variables, Consumption and Income. As I understand it, ...
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Existence of a common term if time series are pairwise cointegrated

Let's suppose that we have $n$ time series that are integrated of order one: $y_t^i\sim I(1)$ for $i=1, 2, \dots, n$ The difference between any two series is stationary: $y_t^i-y_t^j\sim I(0)$ for $...
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Cointegration (different coefficients using VECM /ca.jo and p-values)

I am trying to get the p-values of my cointegrating vector. I read many questions about it and most of the answers relies on ca.jo funtion from ...
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Can I use VAR model on I(1) series with cointegration? [duplicate]

I have four I(1) series, and the Johansen test(ca.jo()) shows there is one cointegration. My purpose is to forecast, so I want to compare the forecasting results of VAR and VECM model. Is this ...
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Why do we need a VECM specification if the I(1) processes are cointegrated?

I happened to question the rationale of employing VECM, since some empirical studies like Basu (2017) employed a VAR model to obtain impulse-response analysis. As far as I know, one should consider ...
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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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26 views

What diagnostic tests are mandatory for VECM?

I have finished a test of VECM, I have included Breusch-Godfrey Serial Correlation LM Test and Heteroskedasticity Test (Breusch-Pagan-Godfrey). Not sure are these sufficient? Do I need to do other ...
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Interpretation of alpha1 versus alpha2, error correction model

I am looking at the Vector Error Correction model, and having trouble with deciphering how to interpret (beyond "it is the speed of adjustment") actual results estimated. Here's a VECM: $\Delta Y_i ...
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In Cointegration, adf test or for VAR models. What makes difference in having trend + Constant, Constant alone, and non

In Cointegration, adf test or for VAR models. What makes difference in having trend + Constant, Constant alone, and non. in below link http://www.econ.uiuc.edu/~econ508/R/e-ta8_R.html It said ...
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Statsmodels VECM - Predicting out-of-sample

After fitting a VECM model, I would like to study its out-of-sample behavior but haven't been able to find a way to do it. More precisely, given X_train and ...
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Like Correlation do we have any measurements in Cointegration

i am new to VEC model We can test for Cointegration using johansen test but like Correlation do we have any measurements or gauge for good Cointergations , Like we say 90% correlation is good and 50%...
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Panel VAR / Panel VECM

I have an unbalanced panel with N=800 and T=72 (quarterly frequency). After conducting some unit root tests, all reject the null that all panels are not stationary (the alternative is that at least ...
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Help with Error Correction Terms (ECTs)?

I have some questions about the correction and error terms of the VECM model. I have a system with 10 variables and 3 vectors of cointegration according to the Johansen test. For each dependent ...
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61 views

How to remove seasonality?

I'm trying to do a VECM with these two monthly variables. I applied the Johansen test and they are cointegrated. As you see, they have a hard seasonality component. Should I apply a filter to remove ...
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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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VAR/VEC models: checking stationarity during cross-validation

I am attempting to derive a single multivariate/vector autoregressive (VAR) model from a large dataset (6-minutes sampled at 250Hz in total w/ 50 vars) using cross-validation (CV) to optimize model-...
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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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Vector error correction model output

I'm struggling with the interpretation of one of my course examples. Here is the R output ...
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42 views

VAR model residual autocorrelation and variable selection

I have a question on VECM model. I have a set of variables I had planned to include in my VECM model where one particular variable may be trend stationary (@ 10% s.l. by ADF test) while the rest are ...
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37 views

Reducing number of time series in VECM

I am exploring using VECM for several time series that are all I(1). However, I am hoping to avoid a model that is too large and was wondering if there is any way I can filter out several variables ...
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129 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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Will VECM handle multiple seasons?

I have two questions: Since VAR (vector autoregression) will not handle seasonality and trend. VECM comes into play which can handle season as well as trend. I had a doubt whether it will handle ...
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VECM with Multicollinearity

I have fit a vector error correction model (VECM) to some macroeconomic data. In particular, I am interested in three relationships real GDP as a function of employment and real wages employment as a ...
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153 views

VAR model for first differences (not a good idea?)

I have read from couple of slides in the internet that if I have two $I(1)$ processes, it’s not a good idea to simply take the differences and include them in a VAR model, as then one might lose ...
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Computing half life from alpha matrix in Cointegration Analysis - Johansen test

This post suggests that we use eigen values to determine the half life of reverting to mean : https://quant.stackexchange.com/questions/2076/how-to-interpret-the-eigenmatrix-from-a-johansen-...
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Interpreting the names used in the output of Johansen test in package urca in R

Here is a snippet from an example in the package urca:- ...
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In R, using the Johansen test for cointegration, how do you know if you should use trend?

As the title, really. In my time series class, we only ever covered using using the option constant, and never trend. But now when playing around, I notice markedly different results. Ie, if I use ...
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349 views

Can I use a VAR in first differences despite having co-integrated data?

I have two variables. Both are I(1), so non-stationary in levels but stationary in first differences. However, having run some tests, I find that both are co-integrated. Based on my statistics ...
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estimating Threshold-Models in seperate equations

I´m currently dealing with threshold VECM models in time series. The basic idea behind a TVECM, according to Lo and Zivot 2001 is There is one point I don´t understand: As far as I see every ...
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458 views

VECM - interpreting output from cajorls()

I am a bit puzzled on how to interpret the test results cajorls() from the urca-package. This function returns the OLS ...
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56 views

What is an alternative to Toda Yamamoto for impulse response analysis with non-stationary and cointegrated variables?

I am interested in impulse response analysis, variance decomposition and granger causality in a VAR framework. However, my variables exhibit cointegration of order 2 as well as integration of the form ...
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VAR/VEC and stationarity [duplicate]

Do VAR and VEC require no unit-roots? I have three variables where two are difference-stationary (unit roots) and one is trend-stationary (no unit root). The three of them are cointegrated. ...
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What exactly does “local identification” mean in the context of structural VARs and VECMs?

In Lutkepohl's "New Introduction to Time Series Analysis", chapter 9, this term is frequently mentioned, but is in no where well-defined. So what exactly does "local identification" mean in this ...
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In VECM, what is the difference between the number of unit root of reverse characteristic polynomial and cointegrating rank?

I read in Lutkepohl's "New Introduction to Time Series Analysis", chapter 6 (page 254) that the number of unit root of reverse characteristic polynomial is the difference between the dimension of the ...
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Why is a process stable only when the cointegrating rank of its VECM equal to the dimension of its process?

According to this book, page 248, it is because $|I_K-A_1-...-A_p|=|-\Pi|$ (reverse polynomial), which is unequal to 0. I have a questions regarding this argument: Wouldn't $|I_K-A_1-...-A_p|=|-\Pi|=...
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Interpretation VECM

I am testing two Variables, lets say "A" and "B" that are cointegration of order I(1). I am using a VECM and define "A" as my dependent variable and the VECM says that the significant error correction ...
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How to use the residual of FMOLS when conducting VECM in Stata

I am trying to figure out whether the results of FMOLS (cointreg command in Stata) has uni-directional or bi-directional Granger causality relationship. I have seen people do this in Eviews but not in ...
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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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R code for Granger representation theorem of VECM model

Is there any R package or code snippet to obtain the Granger representation of a Vector Error Correction Model (VECM) as describe in HANSEN, 2005 ? The VECM model would be the output of ...
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159 views

Lag Zero in VECM

I am trying to fit VECM model on my data. Data contains two non stationary series of two Variables Y and X. I am trying to fit following VECM model using URCA package. Regressing Y on X and lagged ...
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ECM (error correction model): interpretation of a I(1) differentiated time serie as its “variation around its long-run trend”

I am reading Greene's "Econometric Analysis" book, and more specifically the chapter on cointegration. I do not understand his interpretation of the components of an error correction model (page 1003 ...
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VEC model: EViews differences variables authomatically

I am performing a multivariate time series analysis. My variables are stationary at level. Whenever I want to make a VEC model, but EViews will difference the data authomatically. What can I do about ...
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Long-term relation between time series with deterministic trends

say I have two time series that move together but both seem to be characterised by a deterministic trend. I have two questions: How can I test whether the trend is deterministic or stochastic? How ...
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1answer
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VECM lag 1 => is 1-1=0 , or VAR (-1) , or VAR at difference. which one?

Good day for all, I run a regression,all variables are I(1), THE OTIMAL lag according to SIC is one means I should do VECM (1-1=0) the coefficient of the Error correction term (ECT) is negative but ...
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Vector Error Correction Models (sign of the coefficent) [duplicate]

I am working on a VEC model atm, testing for cointegration between 4 variables (the Nikkei, interest rate, M2, and unemployment). My question is this however: When assessing the VECM output, how ...
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1answer
472 views

The role of Granger causality in VAR/VECM model selection

How exactly does identification of Granger Causality (or lack of) between variables affect my decision for what variables to include in my VAR or VECM model? The motivation behind the question is ...
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199 views

Normalization choice in cointegration models

Im a student in econometrics and Im currently working on vector error correction models (VECM). Im facing a problem with correction error coefficients signs. My teacher stated that they must be ...
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1answer
95 views

Using a VAR over a VECM (in spite of of existing cointegration)

Is there ever a reason to use a first differenced VAR over a VECM when all your variables are I(1) and co integration exists? The reason why I ask is because I see in the most recent Bank of Canada ...
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Does it make sense to produce a forecast in R using a VECM in this way? [closed]

My team uses Error correction models to produce forecasts. To do this the Engel Granger 2 step approach was used. I've read online that the 2 step approach is a little outdated and When this was peer-...