Hi all
could anyone tell me how to solve the problem
when running VECM model to focast
VECM doesn't consider the trading volume issue
since trading volume is a sign for liquaidity
how do you encounter this problem
Hi Dan,
In VECM you can not use the volume and price series as variables as the price-volume series will not be cointegrated and the cointegrating rank should be equal to the number of variables.
You can however use the volume data to filter out your trading universe and set a threshold for what you consider adequately liquid. You can even consider the dollar-volume criteria for this.
Hope this helps!