When estimating a VEC model using a two step least squares process,what is the first step?
A)use least squares to estimate the cointegrating relationship
B)use least squares to estimate first differences as a function of estimated residuals
C)use least squares to estimated residuals as a function of first differences
D)use least squares to estimate first differences as a function of lagged differences

Question

Quizplus · Accepted Answer

The first step in estimating a VEC model using a two-step least squares process is to use least squares to estimate the cointegrating relationship. This involves regressing the non-stationary variables on each other to find a linear combination of the variables that is stationary, which represents a long-run equilibrium relationship. This cointegrating vector is then used in the second step to estimate the short-run dynamics of the system. The other options (B, C, and D) do not accurately reflect the first step in the process.

When Estimating a VEC Model Using a Two Step Least