Appropriate test for cointegration.
To test whether two variables are cointegrated, we regress one data series on the other and examine the residuals for a unit root using the Dickey-Fuller/Engle-Granger test. If we reject the null hypothesis, the error terms of the two data series are covariance stationary and cointegrated. The regression results will be valid.
Monday, May 3, 2010
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