Algebra of Integrated Time Series: Evidence from Unit Root Analysis

19 Pages Posted: 3 Jan 2016 Last revised: 15 Mar 2016

See all articles by Hari Luitel

Hari Luitel

Algoma University

Gerry Mahar

Algoma University

Date Written: March 14, 2016

Abstract

It is argued if xt~I(1) and yt~I(1), then running a regression xt on yt would produce spurious results because et would generally be I(1). However, there may exist a 'b' such that et = xt - byt is I(0), then running a regression xt on yt would not produce spurious results. This special case of two integrated time series is known in the literature as cointegration. In this particular case, xt and yt are said to be cointegrated. In our review of the development of the concept of cointegration, we identified that the underlying reason for this special case to arise is the proposition that if xt~I(dx), yt~I(dy), then zt = bxt cyt ~I(max(dx,dy)). In this research, we offer evidence against this proposition.

Suggested Citation

Luitel, Hari and Mahar, Gerry, Algebra of Integrated Time Series: Evidence from Unit Root Analysis (March 14, 2016). Available at SSRN: https://ssrn.com/abstract=2709983 or http://dx.doi.org/10.2139/ssrn.2709983

Hari Luitel (Contact Author)

Algoma University ( email )

1520 Queen Street East
Sault Ste. Marie, Ontario P6A 2G4
Canada
705-949-2301 (Phone)
705-949-6583 (Fax)

HOME PAGE: http://www.algomau.ca/

Gerry Mahar

Algoma University ( email )

1520 Queen St. East
Sault Ste. Marie, Ontario P6A 4G4
Canada
705-949-2301 ext 4758 (Phone)
705-949-6583 (Fax)

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