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.

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.

When two or more time series are cointegrated, they can be represented by a restricted VAR model, where the restriction is due to the equilibrium relationship of the cointegrated series. VECM is a representation of the cointegrated VAR model which looks like an unrestricted VAR in first differences of the original variables, plus the error correction terms (deviations from the cointegrating equilibrium). The lagged first differences can be interpreted as short-term effects of the individual variables, while the error correction term represents the tendency of the variables to move towards the equilibrium (a stationary combination of the original variables).