Abstract
Cointegration means that two or more time series share common stochastic trends. Thus, while each series exhibits smooth or trending behaviour, a linear combination of the series exhibits no trend. For example, short-term and long-term interest rates are highly serially correlated (so they are smooth and in this sense exhibit a stochastic trend), but the difference between long rates and short rates — the ‘term spread’ — is far less persistent and shows no evidence of a stochastic trend. Long rates and short rates are cointegrated.
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Watson, M.W. (2010). Cointegration. In: Durlauf, S.N., Blume, L.E. (eds) Macroeconometrics and Time Series Analysis. The New Palgrave Economics Collection. Palgrave Macmillan, London. https://doi.org/10.1057/9780230280830_6
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DOI: https://doi.org/10.1057/9780230280830_6
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