Specifying Vector Error Correction Models #vecm #var #lags #Johansen #serialcorrelation #innovations

So, what do you understand by vector error correction model (VECM)? You may say any of the following: that it is a system having a vector of two or more variables that all the variables in a VECM are endogenous there are no exogenous variables VECM is constructed only if the variables are cointegrated cointegration implies evidence of a long-run relationship among the variables it is a restricted VAR model with cointegrating restrictions built into the specification constructed to examine long- and short-run dynamics of the cointegrated series restricts the long-run behaviour of endogenous variables to converge to their cointegrating relationships that the cointegrating term is known as the error correction term it is a representation of cointegrated VAR (courtesy of granger’s representation theorem) and that the resulting VAR from VECM representation has more efficient coefficient estimates. Also, note that VAR specified in differences is a mis-specification while VECM is obtained by differencing a VAR, henc