Error correction model: Difference between revisions

Revision as of 14:36, 7 July 2017

Revision as of 20:32, 23 August 2017

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===Engel 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 suchand as [[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.