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st: cointegration - value of the speed of adjustment


From   "Sabina Kummer" <sabina.noo@postmail.ch>
To   statalist@hsphsun2.harvard.edu
Subject   st: cointegration - value of the speed of adjustment
Date   Sun, 13 Jan 2013 15:52:37 +0100 (CET)

Dear all,

I am currently working with error correction models and I have a question regarding the value of the error correction term’s coefficient. I analyze cointegration between two variables according to the Engle-Granger approach and to the Johansen approach.

The coefficient of the error correction term represents the speed of adjustment to the long-term equilibrium. I know that it must be negative and significantly different from zero (otherwise the error correction model can not be validated). My question is the following: must the error correction term’s coefficient be higher than -1 (the value must be between -1 and 0)? What if it is lower than -1? Does that mean that the adjustment is too strong and thus, that the long term equilibrium will never be reached? 
Do both procedures (Engle-Granger and Johansen) have the same requirements regarding the value of this coefficient? 

Thank you very much for your help and your consideration.

Kind regards,

Sabina



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