A Vector Error Correction Model (VECM) an Approach to Short-Run and Long-Run Causality between Solvency and Liquidity : A Study of Oil & Gas Development Company Limited (OGDCL), Pakistan

The aim of the research was to examine the short-run and long-run causality between solvency and liquidity in case of Oil and Gas Development Company Limited (OGDCL), Pakistan. The secondary data of 26 years was employed from 1990 to 2015 to evaluate the results. The series of two separate regressions were run to check causality separately. Out of 9 hypotheses, 4 were rejected and 5 were accepted. Vector Error Correction Model (VECM), Cointegration and Wald test were used as statistical tools. The results concluded that Current Ratio (CR) has no long-run association with Debt to Equity (DTE) and Debt to Assets (DTA), but Quick Ratio (QR) is having long-run association with Debt to Equity (DTE) and Debt to Assets (DTA). Moreover, Current Ratio (CR) has short-run association with Debt to Assets (DTA). Similarly, Quick Ratio (QR) is having no short-run association with Debt to Equity (DTE)