(b) A model of stock prices where diversification among stocks leads to a reduction in risk, suggests that the stock price index P1t in market 1 is not cointegrated with the stock price index Pzt in market 2, given that both indexes are |(1) series. (i) What does the statement 'the stock price indexes in both markets are not cointegrated' mean? (1 mark) A researcher estimated the following regression by OLS using a long span of annual data for the US (stock price index 1) and Australia (stock price index 2): (ii) Pat = Bo + B1P2t + ut The researcher then performed an ADF test on the estimated residuals. In performing this test, should the researcher include both a constant and time trend in the ADF regression, or just the constant and no time trend, or neither? Explain you answer fully. (1 mark) Is the ADF test statistic t-distributed? Justify your answer. (1 mark) The ADF test statistic was found to be -4.75. At the 5% level, what do you conclude? Justify your answer. (1 mark). (For your information, the 5% ADF critical value is -2.891 and the 5% Engle- Granger critical value is -3.398). (b) A model of stock prices where diversification among stocks leads to a reduction in risk, suggests that the stock price index P1t in market 1 is not cointegrated with the stock price index Pzt in market 2, given that both indexes are |(1) series. (i) What does the statement 'the stock price indexes in both markets are not cointegrated' mean? (1 mark) A researcher estimated the following regression by OLS using a long span of annual data for the US (stock price index 1) and Australia (stock price index 2): (ii) Pat = Bo + B1P2t + ut The researcher then performed an ADF test on the estimated residuals. In performing this test, should the researcher include both a constant and time trend in the ADF regression, or just the constant and no time trend, or neither? Explain you answer fully. (1 mark) Is the ADF test statistic t-distributed? Justify your answer. (1 mark) The ADF test statistic was found to be -4.75. At the 5% level, what do you conclude? Justify your answer. (1 mark). (For your information, the 5% ADF critical value is -2.891 and the 5% Engle- Granger critical value is -3.398)