vecm

Convert vector autoregression (VAR) model to vector error-correction (VEC) model

Syntax

VECMdl = vecm(Mdl)

Description

VECMdl = vecm(Mdl) converts the VAR(p) model Mdl to its equivalent VEC(p – 1) model representation VECMdl.

Examples

Convert VAR Model to VEC Model

Consider a VAR(2) model for the following seven macroeconomic series.

• Gross domestic product (GDP)

• GDP implicit price deflator

• Paid compensation of employees

• Nonfarm business sector hours of all persons

• Effective federal funds rate

• Personal consumption expenditures

• Gross private domestic investment

Load the Data_USEconVECModel data set.

load Data_USEconVECModel

For more information on the data set and variables, enter Description at the command line.

Determine whether the data needs to be preprocessed by plotting the series on separate plots.

figure;
subplot(2,2,1)
plot(FRED.Time,FRED.GDP);
title('Gross Domestic Product');
ylabel('Index');
xlabel('Date');
subplot(2,2,2)
plot(FRED.Time,FRED.GDPDEF);
title('GDP Deflator'); 
ylabel('Index');
xlabel('Date');
subplot(2,2,3)
plot(FRED.Time,FRED.COE);
title('Paid Compensation of Employees');
ylabel('Billions of $');
xlabel('Date');
subplot(2,2,4)
plot(FRED.Time,FRED.HOANBS);
title('Nonfarm Business Sector Hours');
ylabel('Index');
xlabel('Date');

figure;
subplot(2,2,1)
plot(FRED.Time,FRED.FEDFUNDS);
title('Federal Funds Rate');
ylabel('Percent');
xlabel('Date');
subplot(2,2,2)
plot(FRED.Time,FRED.PCEC);
title('Consumption Expenditures');
ylabel('Billions of $');
xlabel('Date');
subplot(2,2,3)
plot(FRED.Time,FRED.GPDI);
title('Gross Private Domestic Investment');
ylabel('Billions of $');
xlabel('Date');

Stabilize all series, except the federal funds rate, by applying the log transform. Scale the resulting series by 100 so that all series are on the same scale.

FRED.GDP = 100*log(FRED.GDP);      
FRED.GDPDEF = 100*log(FRED.GDPDEF);
FRED.COE = 100*log(FRED.COE);       
FRED.HOANBS = 100*log(FRED.HOANBS); 
FRED.PCEC = 100*log(FRED.PCEC);      
FRED.GPDI = 100*log(FRED.GPDI);

Create a VAR(2) model using the shorthand syntax. Specify the variable names.

Mdl = varm(7,2);
Mdl.SeriesNames = FRED.Properties.VariableNames;

Mdl is a varm model object. All properties containing NaN values correspond to parameters to be estimated given data.

Estimate the model using the entire data set and the default options.

EstMdl = estimate(Mdl,FRED.Variables)

EstMdl = 
  varm with properties:

     Description: "AR-Stationary 7-Dimensional VAR(2) Model"
     SeriesNames: "GDP"  "GDPDEF"  "COE"  ... and 4 more
       NumSeries: 7
               P: 2
        Constant: [15.835 9.91375 -14.0917 ... and 4 more]'
              AR: {7×7 matrices} at lags [1 2]
           Trend: [7×1 vector of zeros]
            Beta: [7×0 matrix]
      Covariance: [7×7 matrix]

EstMdl is an estimated varm model object. It is fully specified because all parameters have known values.

Convert the estimated VAR(2) model to its equivalent VEC(1) model representation.

VECMdl = vecm(EstMdl)

VECMdl = 
  vecm with properties:

             Description: "7-Dimensional Rank = 7 VEC(1) Model"
             SeriesNames: "GDP"  "GDPDEF"  "COE"  ... and 4 more
               NumSeries: 7
                    Rank: 7
                       P: 2
                Constant: [15.835 9.91375 -14.0917 ... and 4 more]'
              Adjustment: [7×7 matrix]
           Cointegration: [7×7 diagonal matrix]
                  Impact: [7×7 matrix]
   CointegrationConstant: [7×1 vector of NaNs]
      CointegrationTrend: [7×1 vector of NaNs]
                ShortRun: {7×7 matrix} at lag [1]
                   Trend: [7×1 vector of zeros]
                    Beta: [7×0 matrix]
              Covariance: [7×7 matrix]

VECMdl is a vecm model object.

Input Arguments

Mdl — VAR model

varm model object

VAR model, specified as a varm model object created by varm or estimate. Mdl must be fully specified.

Output Arguments

VECMdl — VEC model equivalent

vecm model object

VEC model equivalent, returned as a vecm model object.

Algorithms

Consider the m-dimensional VAR(p) model in difference equation notation.

$$y_t=c+dt+{\displaystyle \sum _{j=1}^p{\Gamma }_j{y}_{t-j}}+\beta x_t+{\epsilon }_t.$$

• y_t is an m-by-1 vector of values corresponding to m response variables at time t, where t = 1,...,T.

• c is the overall constant.

• d is the overall time trend coefficient.

• x_t is a k-by-1 vector of values corresponding to k exogenous predictor variables.

• β is an m-by-k matrix of regression coefficients.

• ε_t is an m-by-1 vector of random Gaussian innovations, each with a mean of 0 and collectively an m-by-m covariance matrix Σ. For t ≠ s, ε_t and ε_s are independent.

• Γ_j is an m-by-m matrix of autoregressive coefficients.

The equivalent VEC(p – 1) model using lag operator notation is

$$(1-L)y_t=c+dt+\Pi y_{t-1}+{\displaystyle \sum _{j=1}^{p-1}{\Phi }_j\left(1-L\right)y_{t-j}}+\beta x_t+{\epsilon }_t.$$

• Ly_t = y_{t – 1}.

• Π is an m-by-m impact matrix with a rank of r.

• Φ_j is an m-by-m matrix of short-run coefficients

Version History

Introduced in R2017b