In the paper by Terence C. Mills and Alessandra G. Mills (1991) on The International Transmission of Bond Market Movements, they investigate the relationships between the government bond yield of four countries, namely the US, the UK, West Germany (WG) and Japan. Mills and Mills (1991) performed unit root tests on each of the four countries bond yield and found the yield to be an I(1) process. They also performed a cointegration test on all four countries bond yield but failed to find any cointegrating relationships amongst them. They then estimated a Vector Autoregression (VAR) of lag order 8. To generate variance decompositions from their model, they considered two Cholesky orderings: the first ordering (I) is (US, UK, WG, Japan) and the second ordering (II) is (Japan, UK, WG, US).

B) Suppose you believe that the US and UK bond prices possess a long-run relationship. Explain how you can undertake a formal test on this conjecture. [5]