Consider the bivariate system Xt Xt 1 vt Yt Xt t where vt and t are each independently distributed with mean zero and variance 2 Develop an expression for Yt Yt 1, and show that X and Y are cointegrated What is the cointegrating linear combination in this case ...

Here the independent error has mean 0 and var ...

Consider the bivariate system Xt = Xt-1 + vt Yt = Xt + t where vt and

Question:

Consider the bivariate system
Xt = Xt-1 + vt
Yt = Xt + εt
where vt and εt are each independently distributed with mean zero and variance σ2. Develop an expression for Yt - Yt-1, and show that X and Y are cointegrated. What is the cointegrating linear combination in this case?