I have an ARDL error correction model, in the CUSUM chart as far as I diagnosed there is a negative trend, moving means. Before that, I found that the explanatory variable and the dependent variable are not integrated to the same degree. I know I could not use ECM when there is no cointegration, I don't know is there any other model that gives more consistent results.
Could anyone offer a remedy?
In CUSUM chart positive and negative deviations will tend to cancel each other out and the cusum plot will run horizontally when the system is stable. If the system average begins to change, the plot will move increasingly upwards or downwards. The CUSUM chart is centered around the mean value of the process. The process is said to be "out of control" if the cumulative sums of the standardized deviations exceed a specified range .
Defne Alpdogan what the CUSUM results may be telling you is that you have a cointegration relationship with a structural break; maybe one of your variables is integrated with the same order as the others, but with a structural break. Then you can use the break in the cointegrating equation and estimate the EC model.
On the other hand, depending on the purpose of your analysis, you can always use a VAR model or the Bayesian family of VAR models. You DO NOT need to have variables integrated with the same order to estimate a VAR.
Well, Your CUSUM results indicate that the linear model is inappropriate to be estimated as this indicates some nonlinear behaviour. I would suggest the the use of nonliner model. I f you want to test for cointegration, use nonlinear cointegration analysis of Seo 2006 or even some new developed nonlinear cointegration analysis.
Regards,
Dr Katleho Makatjane
Business and Risk Analyst
Basetsana Consultants
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