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Steps in Vector Autoregressive (VAR) and Vector Error Correction (VEC) Models

Steps in Vector Autoregressive (VAR) and Vector Error Correction (VEC) Models Check co-integration using Johansen co-integration test If you find any co-integration equation, go for VEC model. However, VAR is fine too for simplicity. Estimation parameters do not differ drasticially. Decide on lag orders. Perform diagnostic check. If all good, perform out-sample forecast. Check accuracy of both in-sample and out-sample forecast.

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