When estimating a VEC model using a two step least squares process,what is the second 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 second step in estimating a Vector Error Correction (VEC) model using a two-step least squares process involves using least squares to estimate first differences as a function of the estimated residuals from the cointegrating relationship. This step incorporates the error correction term, which represents the short-term adjustments needed to return to the long-term equilibrium path.

When Estimating a VEC Model Using a Two Step Least