Error correction model: Difference between revisions

Revision as of 17:26, 3 July 2020

Revision as of 09:28, 18 December 2020

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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 led [[John Denis Sargan|Sargan]] (1964) to develop the ECM methodology, which retains the level information.<ref>Sargan, J. D. (1964). "Wages and Prices in the United Kingdom: A Study in Econometric Methodology", 16, 25–54. in ''Econometric Analysis for National Economic Planning'', ed. by P. E. Hart, G. Mills, and J. N. Whittaker. London: Butterworths</ref><ref>{{cite journal |last=Davidson |first=J. E. H. |first2=D. F. |last2=Hendry |authorlink2author-link2=David Forbes Hendry |first3=F. |last3=Srba |first4=J. S. |last4=Yeo |year=1978 |title=Econometric modelling of the aggregate time-series relationship between consumers' expenditure and income in the United Kingdom |journal=[[Economic Journal]] |volume=88 |issue=352 |pages=661–692 |jstor=2231972 }}</ref>

==Estimation==

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* {{cite book |last=Dolado |first=Juan J. |last2=Gonzalo |first2=Jesús |last3=Marmol |first3=Francesc |chapter=Cointegration |pages=[https://archive.org/details/companiontotheor00balt/page/n646 634]–654 |title=A Companion to Theoretical Econometrics |url=https://archive.org/details/companiontotheor00balt |url-access=limited |editor-first=Badi H. |editor-last=Baltagi |___location=Oxford |publisher=Blackwell |year=2001 |isbn=0-631-21254-X |doi=10.1002/9780470996249.ch31 }}

* {{cite book |first=Walter |last=Enders |title=Applied Econometric Time Series |edition=Third |___location=New York |publisher=John Wiley & Sons |year=2010 |isbn=978-0-470-50539-7 |pages=272–355 }}

* {{cite book |last=Lütkepohl |first=Helmut |authorlinkauthor-link=Helmut Lütkepohl |title=New Introduction to Multiple Time Series Analysis |url=https://archive.org/details/newintroductiont00ltke |url-access=limited |___location=Berlin |publisher=Springer |edition= |year=2006 |isbn=978-3-540-26239-8 |pages=[https://archive.org/details/newintroductiont00ltke/page/n251 237]–352 }}

* {{cite book |last=Martin |first=Vance |last2=Hurn |first2=Stan |last3=Harris |first3=David |title=Econometric Modelling with Time Series |___location=New York |publisher=Cambridge University Press |year=2013 |isbn=978-0-521-13981-6 |pages=662–711 }}