2.2.3 Co-integration Test
The EG two-step method is a common method for testing the co-integration
relationship between time series, which was proposed by Engle and
Granger in 1987(Engle & Granger, 1987). The test procedure of this
method is:
The first step is to use the ordinary least square method(OLS) to
regress multiple variables and get a residual sequence;
The second step is to conduct ADF unit root test on the residual
sequence obtained in the first step. If the residual sequence is
stationary, it is proved that the variables are co-integrated.