(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.