What is the difference between a VEC and a VAR?
A)The VAR model is for only 2 series and VEC models accommodate 3 or more variables.
B)The VAR model is a special form of the VEC model and should be used for nonstationary series.
C)The VEC model is a special form of the VAR and should be used with cointegrated series.
D)The VAR model deals with stationary series while the VEC allows for dynamic series.

Question

Quizplus · Accepted Answer

The VEC model is a special form of the VAR model that should be used when the variables under analysis are cointegrated, implying a long-run relationship between them. The VEC model uses the error correction term to adjust for any deviations from this long-run equilibrium, while the VAR model does not incorporate any such mechanism. Therefore, the VEC model is more appropriate when dealing with nonstationary time series that are related and cointegrated.

What Is the Difference Between a VEC and a VAR