# 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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### Deterministic trend in VECM/VAR

I have a question regarding VECMs with deterministic terms. Consider the following VECM $$\Delta y_t= A(B'y_{t−1}+c_0)+c_1+B_1\Delta y_{t-1}+\dots+B_q\Delta y_{t-q}+\epsilon_t.$$ Note, that this ...
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### Johansen-Procedure: Values of teststatistic and critical values of test?

I am trying to run a Johansen-Procedure in a set of macroeconomic variables (GDP, credit outstanding and industrial production). I am working with them in level. How should I interpret the following ...
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### Johansen-Procedure Interpretation (ca.jo)

I am trying to run a Johansen-Procedure in a set of macroeconomic variables (GDP, credit outstanding and industrial production). I am working with them in level. How should I interpret the following ...
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### Multivariate time series analysis with different sampling rates

I have four time series that cover the same time period. I want to perform cointegration analysis on them to investigate any potential cointegration relations and to estimate a VECM model. However, ...
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### Cointegration in ARIMAX regressions in R?

I’m running some ARIMA(X) regressions in R with several (control-) regressors including dummy variables and have some general questions concerning possibly cointegrated variables in ARIMA regressions. ...
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### My VECM Model Produces The Same Residuals For A Two Asset Portfolio

I have a two asset portfolio with 2 cointegrated ETF's. I would like to see when the ETF's deviates from their equilibrium. Before I show the model, what I expect to happen was that if one ETF's ...
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### How to retrieve alpha and beta from the Johansen Test

I am struggling a little bit with the Johansen test. I understand how to carry out the trace test(s) and how the rank of $\pi$ (standard notation). However, I am unsure on how to retrieve $\alpha$ and ...
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### VECM: Normalized cointegrated vectors

I try to understand the cointegration vector of VECM by the example below: a Johansen cointegration test of three variables. The test results indicate there are 2 cointegration relationship (r<=2)...
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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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### VECM Impulse Response Function: Interpretation of Results

I estimated a VECM and generated Generalised Impulse Response Functions based on Johansen Cointegration. Below is an output of two response variables to a shock in GDP. My issue is, I have strong ...
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### How to interpret impulse-response functions in relation to beta and alpha coefficients?

How do I interpret impulse-response functions (IRFs) in relation to beta and alpha coefficients obtained from a Johansen cointegration test? For instance, my target (normalized) variable Y has a speed ...
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### Deseasonalize data AND deflate with CPI?

I have property return variables and economic variables that I am using in a VECM/VAR to generate Impulse Response Functions. I have deflated my data with CPI, but do I also have to deseasonalize the ...
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### Impulse Response Functions R: Transitory Shocks for Non-Stationary Data

I am working on generating Impulse Response Functions via the VECM and VAR models, an hence have data that is non-stationary in levels, stationary in first differences and cointegrated. My IRFs ...
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### VECM with first differences? [closed]

Is it ok to take first differences of data which is non stationary in levels but stationary in first differences (and cointegrated), and input these differenced variables into the VECM? Or does this ...
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### VAR for Non-Stationary Data? [duplicate]

I have property return variables and economic variables in natural log form, which are non-stationary in level and stationary in first differences, but are not cointegrated. To my understanding, this ...
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### Levels or First Differences, VECM or VAR for Ultimate Impulse Response Functions?

My final goal is to generate Impulse Response Functions in R. I have variables that are non stationary when I set k = 5 in a Unit Root test, and they are cointegrated which to my understanding ...
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### VECM and Impulse Response Functions in R: Trend and Stationarity [duplicate]

I am looking to ultimately generate Impulse Response Functions and plotting them for a set of variables. These variables are all non-stationary in levels when a lag order of 5 is selected. They are ...
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### Cointegration in R: Which regressions are performed in urca::ca.jorls and how does the output differ from urca::ca.jo?

In cajorls function from urca package a series of OLS is performed. From the documentation: This function returns the OLS ...
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### I want to use VECM, does that mean all my variables should be stationary in the first difference at trend and intercept?

All my variables are I(1) using none, and intercept models, but not stationary using trend and intercept models. Not sure if I can use these variables in VECM?
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### When should one use breakpoint unit root test, e.g. Zivot-andrew unit root test

I have conducted the ADF unit root test, all my variables are I(1) in all the three models: intercept, trend and intercept, and none. But my reviewer suggested me to include a structural break unit ...
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### (VAR/VECM) Difference between fitted value and predicted value using in-sample data

My understanding of the mechanism of generating fitted values of VAR or VECM is much like lm() (perhaps since VAR/VECM use linear regression to estimate coefficients?), where the data is just used to ...
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### How well do VECM estimates perform when used for short term price forecasting

I was wondering if VECM can be used for estimating short term prices of assets, natural gas for instance. From what I understand it seems like its more used for deriving a long term estimation of an ...
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### How to obtain Covariance-variance matrix for VECM

I am trying to conduct a causality analysis with a VECM, and I am looking for ways to extract the Covariance-Variance matrix and the correlation matrix from the fitted VECM using the already existing ...
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### VAR obtained from vec2var() and and regular VAR giving different IRF and OIRF

I am currently trying to generate the orthogonal impulse response functions (OIRF) of a VECM with two variables. Both variables are I(1) and there is definitely a cointegration at all levels as tested ...
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### Interpreting Vector Error Correction Model in STATA

I'm studying the relationship between house prices and GDP, unemployment, mortgage rate, construction starts and construction costs. Kwiatkowski-Phillips-Schmidt-Shin test declines stationarity and ...
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### Unstable panel VAR / PVAR

Quick question on PVARs. I am using Stata's user-written pvar package. After running the unit root tests using xtunitroot, I ...
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### VECM: Why does Speed of adjustment/Error Correction Term have to be a matrix?

From what I understand, Loading matrix, or alpha, is the same as Error Correction Matrix, which also refers to the speed of adjustment. However, if the speed of adjustment measures how many percentage ...
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### 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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### Level VAR stability for VECM estimation

I am trying to estimate VECM model for I(1) and cointegrated data. First, I try to find the optimal number of lags by using VARselect by following the below steps: level data is given to VARselect, ...
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### Interpretation of Betas and alphas in a VECM

Imagine I set up a VECM where there is only one cointegrated vector among three variables A, B and C and the vector of betas B1, B2 and B3 is (1,-0.25, -0.4) and the alphas a1, a2 and a3 are -0.5, -0....
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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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### 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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