Applied Example

In this example Exports and imports are the variables used for conducting VECM. Both the
variables are included in the analysis in natural log form.
Unit root Analysis:
To assess the unit root of the series, ADF test has been used. Below are the results obtained.

Augmented Dickey Fuller test

Variable Level First Difference
LExports -1.8010 -7.1176***
LImports -0.8585 -5.7827***
*** Significant at 1% level of significance
The Null hypothesis for the test is there is a unit root in the data series against the alternative
that there is not the unit root in the data series. As the results shows evidence for the rejection
of null hypothesis at first difference, it can be concluded that both the series are not stationary
at level but stationary at first difference.
Optimal lag length:
The following are the results obtained for optimal lag length.

Maximum indicators suggest to include 3 lags in the model.

Co – integration analysis:
The Johson cointegration test has been used to assess the long – run relationship among the
variables. Below are the results obtained.
The results indicate that there are 1 cointegration vector exists . we can use VECM in this
study.
Following are the results of VECM obtained.