ARDL/ECM Question

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mickeykozzi
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Joined: Wed Sep 26, 2018 8:13 pm

ARDL/ECM Question

Postby mickeykozzi » Fri Jul 31, 2020 12:23 am

ARDL/ECM Question

Hello. When I run the Error Correction Form in Eviews, it produces the ECM/ARDL parsimonious model.

When I then run the residual diagnostic tests (as pictured) for Normality, Serial Correlation and Heteroskedasticity, and CUSUM, are the results from the ECM/ARDL Model or the original ARDL model given when first running the ARDL Model? Can I use these results for my ECM/ARDL Model?
Collecting Residual results are obviously very important. Thank you.

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EViews Gareth
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Re: ARDL/ECM Question

Postby EViews Gareth » Fri Jul 31, 2020 7:42 am

Original ARDL
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mickeykozzi
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Joined: Wed Sep 26, 2018 8:13 pm

Re: ARDL/ECM Question

Postby mickeykozzi » Fri Jul 31, 2020 8:36 am

Hi,
So how do I find the residual results for the ECM/ARDL?
Bth the original ARDL and the parsimonious ECM/ARDL use the same seated mod, so I'm guessing they have the same residual result???

EViews Mirza
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Joined: Sat Apr 22, 2017 8:23 pm

Re: ARDL/ECM Question

Postby EViews Mirza » Fri Jul 31, 2020 3:19 pm

mickeykozzi wrote:Hi,
So how do I find the residual results for the ECM/ARDL?
Bth the original ARDL and the parsimonious ECM/ARDL use the same seated mod, so I'm guessing they have the same residual result???


The residuals from the contemporaneous and the ECM model are identical. All inferences on the residuals generated internally hold true regardless of the model transformation. Remember, the ECM is just a re-expression of the contemporaneous ARDL form. You can also verify this with a simple program I've attached below.

Code: Select all

wfcreate a 1901 2000

'make some data
series y = @rnorm
series x = @rnorm
series z = @rnorm

'estimate ardl with fixed lags (so we can more easily grab substituted coefficient specification below)
equation eq.ardl @fl(y,1) @fl(x,2) @fl(z,3)

'make ardl residuals (not from ecm regression)
eq.makeresids rez_ardl

'make and freeze the ecm output (since we can't grab ecm coefficients otherwise)
freeze(ecm) eq.ecreg

'make cointegration vector called "coint"
eq.makecoint coint

'grab substituted coefficient spec from ecm table
%scoef = ""

for !k = 1 to 6
   if (!k < 6) then
      %scoef = %scoef +  ecm(13 + !k, 2) + "*" + ecm(13 + !k,1) + "+"
   else
      %scoef = %scoef +  ecm(13 + !k, 2)  + "*coint(-1)" 'replace the "CointEq(-1)" instance with "coint(-1)"
   endif
next

'replace any "+-" instance with "-"
%scoef = @replace(%scoef, "+-", "-")

'make ecm residuals
series rez_ecm = d(y)-({%scoef})

'show difference between ardl and ecm residuals
show rez_ardl-rez_ecm

'you can see that the residuals are virtually identical

mickeykozzi
Posts: 10
Joined: Wed Sep 26, 2018 8:13 pm

Re: ARDL/ECM Question

Postby mickeykozzi » Fri Jul 31, 2020 3:45 pm

Thank you Mirza.
I had a feeling that this was the case, as I noticed the ARDL selection model was the same for the ARDL and then the ECM Model (that is parsimoniously selected).You are saying that model transformation does not change the residuals (I thought this might be the case).

I have another question for you as well.

There appears to be 2 methods in finding ARDL and ECM:

1) The Eviews method
2) OLS method

I notice that some Youtube Instruction videos (from Drs of Economics) use the OLS ARDL method, that is they creaet a long run model (such as: GDP C CON EXP NE) My supervisor says creating a longrun model from a simple OLS is incorrect.

So why are there 2 methods of creating an ARDL and ECM? WHy do people use both?

Thanks :)

EViews Mirza
Posts: 52
Joined: Sat Apr 22, 2017 8:23 pm

Re: ARDL/ECM Question

Postby EViews Mirza » Fri Jul 31, 2020 4:48 pm

mickeykozzi wrote:There appears to be 2 methods in finding ARDL and ECM...


I'm not aware that there are multiple approaches to expressing the contemporaneous ARDL form into its EC equivalent. They are both equivalent representations of the same underlying structure. However, the ARDL model is typically estimated via OLS, and that is correct. Namely, the estimation doesn't require anything more than OLS.

You should check out our blog series on ARDL models which goes into significant detail (more than you'll typically need) on building, manipulating, and estimating ARDL models.

http://blog.eviews.com/2017/04/autoregressive-distributed-lag-ardl.html
http://blog.eviews.com/2017/05/autoregressive-distributed-lag-ardl_8.html
http://blog.eviews.com/2017/05/autoregressive-distributed-lag-ardl.html

mickeykozzi
Posts: 10
Joined: Wed Sep 26, 2018 8:13 pm

Re: ARDL/ECM Question

Postby mickeykozzi » Fri Jul 31, 2020 11:09 pm

Thank you EViews Mirza, I have read these and they are very helpful.

The example I refer to can be found in this youtube example by Crunch Economics.
Many other authors on youtube follow the same method

https://www.youtube.com/watch?v=2F1OY_1X8A0.

In explaining it simply, I have added photors:

Photo 1: Shows the short-run and long-run model specifications used in the LS - Least Squares method.
Photo 2: Using the long-run specification, you create the ECM series. Then you place in the LS equations (short run and long run) and run the model
Photo 3: You run the short run and long run (EMC model) with the LS method. The ARDL-ECM model is then displayed

As you can see, this is a different method used.
Are you able to tell me why authors use this method?
My supervisor seems to think that the long-run model is not specified properly here.

If you did this method and compared it to the Eviews method (that we have spoken about), the long run model and ARDL contain different coefficients completely.

What are you thoughts?

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