Error correction model: Difference between revisions

Revision as of 18:05, 29 April 2018

Revision as of 01:48, 28 August 2018

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Because of the stochastic nature of the trend it is not possible to break up integrated series into a deterministic (predictable) [[trend stationary|trend]] and a stationary series containing deviations from trend. Even in deterministically detrended [[random walk]]s walks spurious correlations will eventually emerge. Thus detrending doesn't solve the estimation problem.

In order to still use the [[Box–Jenkins| Box–Jenkins approach]], one could difference the series and then estimate models such as [[ARIMA]], given that many commonly used time series (e.g. in economics) appear to be stationary in first differences. Forecasts from such a model will still reflect cycles and seasonality that are present in the data. However, any information about long-run adjustments that the data in levels may contain is omitted and longer term forecasts will be unreliable.

This leadled [[John Denis Sargan|Sargan]] (1964) to develop the ECM methodology, which retains the level information.

==Estimation==