Assume That You Are Trying to Model the Relationship Between

question 1

Multiple Choice

Assume that you are trying to model the relationship between house prices and rents. If you find that both series are non-stationary and a linear combination of the two series is stationary, which of the following is true?
(I) Regressing the levels of house prices on the levels of rents could lead to spurious regressions
(II) House prices and rents are cointegrated
(III) An appropriate linear combination of house prices and rents is I(1)
(IV) House prices and rents are not cointegrated

• A) I only
• B) I and II only
• C) I, II and III only
• D) I, II, III and IV only

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