Error correction model: Difference between revisions

Revision as of 08:08, 29 August 2017

Revision as of 17:17, 10 October 2017

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==Estimation==

Several methods are known in the literature for estimating a refined dynamic model as described above. Among these are the EngelEngle and Granger 2-step approach, estimating their ECM in one step and the vector-based VECM using [[Johansen test|Johansen's method]].

===EngelEngle and Granger 2-step approach===

The first step of this method is to pretest the individual time series one uses in order to confirm that they are [[Stationary process|non-stationary]] in the first place. This can be done by standard [[unit root]] DF testing and [[Augmented Dickey–Fuller test (to test if errors are serially correlated or otherwise]].

Take the case of two different series <math>x_t</math> and <math>y_t</math>. If both are I(0), standard regression analysis will be valid. If they are integrated of a different order, e.g. one being I(1) and the other being I(0), one has to transform the model.