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

Question: Consider the bivariate system Xt = Xt-1 + vt Yt = Xt + t where vt and t are each independently distributed with mean zero

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?

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