Cointegration

The relationships among nonstationary variables can be analyzed if they share a common stochastic trend. A way of capturing this common stochastic trend is the application of the tool of cointegration. That is, cointegration can be used to identify long-run relationships between variables. The two most-often employed methods to test for cointegration are the Engle-Granger cointegration test and the Johansen-Juselius test. In this chapter, we describe cointegration analysis and the tests for cointegration. We apply cointegration to test for stock market price efficiency and international stock market linkages