Cointegration in Single Equations

Abstract

The VAR framework of the previous chapter requires that all the time series contained in the model be stationary. Whilst stationarity can be achieved, if necessary, by differencing each of the individual series, is this always an appropriate approach to take when working within an explicitly multivariate framework? We begin our answer to this question by introducing the simulation example considered by Clive Granger and Paul Newbold in an important article examining some of the likely empirical consequences of nonsense, or spurious, regressions in econometrics.¹