if two variables xt and yt are said to be cointegrated which of the following statements
Answers
If the 2 variables x and y are individually I(1), clearly they cannot be stationary so that
(i) is wrong. Although in general there can be more than one independent linear combination of I(1) variables that are stationary, the maximum number of linearly independent cointegrating combinations is given by "n -1" where n is the total number of variables in the regression equation (y and all of the x's). Since there are only two variables here (y and x), there can only be at most one independent linear combination of the variables that is stationary. The cointegrating equation describes the long run behaviour of the series. This can be seen by calculating the long run static equilibrium solution to the error correction model (ECM), which will result in everything except the cointegrating terms disappearing, so that the latter must describe the long-run relationship. The first-differenced terms will describe the short-run relationships between the series. So
(iii) is wrong. Finally, by definition, for there to be cointegration between y and x, the residuals from the cointegrating regression must be stationary. So (ii) and (iv) are correct. a
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Liplicy,
If two variables..X, and are said to be cointegrated, which of the following statements
are true?
X, and must both be stationary.
Only one linear combination of X, and X, will be stationary The cointegrating equation for X, and describes the short-run relationship
between the two series.
The residuals of a regression of on X, must be stationary.
iv)
a) (ii) and (iv) only
b) (i) and (ii) only
c) . (ii) and (iii) only
d) (1.1).(ii) and (iv)
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