(a) Consider a series of values for the spot and futures prices of a given commodity. In...

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(a) Consider a series of values for the spot and futures prices of a given commodity. In the context of these series, explain the concept of cointegration. Discuss how a researcher might test for cointegration between the variables using the Engle–Granger approach. Explain also the steps involved in the formulation of an error correction model.

(b) Give a further example from finance where cointegration between a set of variables may be expected. Explain, by reference to the implication of non-cointegration, why cointegration between the series might be expected.AppendixLO1

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