Cointegration in Frequency Domain

Daniel Levy, Bar-Ilan University and Emory University

Abstract. Existence of a cointegration relationship between two time series in the time domain imposes restrictions on the series zero-frequency behaviour in terms of their squared coherence, phase, and gain, in the frequency domain. I derive these restrictions by studying cross-spectral properties of a cointegrated bivariate system. Specifically, I demonstrate that if two difference stationary series, X_t and Y_t, are cointegrated with a cointegrating vector [1  b] and thus share a common stochastic trend, then at the zero frequency, the squared coherence of (1 - L) X_t and (1 - L) Y_t will equal one, their phase will equal zero, and their gain will equal |b|.

JEL Codes: C32, C50, C14

Keywords: Common Stochastic Trend, Cointegration, Frequency Domain Anlysis, Cross-Spectrum, Zero-Frequency.