Engle-Granger Cointegration

Engle-Granger cointegration is a statistical method used to identify a long-term equilibrium relationship between two or more time series data sets. When these series are individually non-stationary (their trends change over time), cointegration indicates they move together over the long run, maintaining a consistent relationship. For example, if one series increases, the other tends to follow suit, preventing their difference from drifting indefinitely. Detecting cointegration helps economists and analysts understand if variables like prices or interest rates are linked over time, suggesting a stable relationship despite short-term fluctuations.