In order to perform cointegration,you need to identify
A)a second independent variable that is correlated with the dependent variable but uncorrelated with the first independent variable.
B)an independent variable that moves with the dependent variable and produces residuals that are I(0)when the dependent variable is regressed on it.
C)an independent variable that moves with the dependent variable and produces residuals that are I(1)when the dependent variable is regressed on it.
D)an independent variable that moves with the dependent variable and produces non-stationary residuals.

Question

Quizplus · Accepted Answer

Cointegration involves identifying a relationship between two variables that have a long-run equilibrium, meaning they move together over time. To do this, we need an independent variable that is contemporaneously correlated with the dependent variable and produces residuals that are stationary (i.e., have a mean and variance that are constant over time) when the dependent variable is regressed on it. Option B identifies such a variable. Option A involves a variable that is uncorrelated with the first independent variable and is therefore not related to cointegration. Option C involves a variable that produces residuals that are not stationary, while option D involves a variable that produces residuals that are already stationary and therefore does not help in identifying a long-run relationship.

In Order to Perform Cointegration,you Need to Identify