ECON217_HW_Cointegration - Homework (cointegration) 1. 2....

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1 Homework (cointegration) 1. What does Y t ~ I(d) mean? 2. Let Y t (Y 1t , Y 2t )’. What does “ Y t ~ CI(d,b)” mean? 3. Explain how the cointegration concept could be used to study economic equilibrium relationships. Use an economic example to illustrate your argument. 4. Consider the bivariate system Y 1t = Y 2t + 1t and Y 2t = Y 2t-1 + 2t , where 1t = 1t + k 1 , 2t = 2t + k 2 , k 1 and k 2 are constants, and 1t and 2t are independent white noises. a. Show that Y t = (1 - L) 1 t 2 t = 1 L 01 k 1 k 2 + 1 L 0 1 1 t 2 t b. Show that E( Y t ) = 1 2 1 L 0 1 k 1 k 2 and the cointegrating vector is orthogonal to E( Y t ). c. Show Y t = 1 2 + 1 L 0 1 1 t 2 t , where u 1 u 2 is defined in (b).
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This note was uploaded on 09/29/2010 for the course ECON Econometri taught by Professor Fairlie during the Winter '09 term at University of California, Santa Cruz.

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