Gate 3: Engle–Granger on Log Prices

What is the null hypothesis of the residual test in Step 2?

• No cointegration: the residual has a unit root and wanders
• The two coins are cointegrated
• The hedge ratio β is zero

Two coins have median train dollar volumes of $35M (coin A) and $120M (coin B). Under this course's rule, which is the dependent leg on the left of the regression?

• A, the less liquid coin, so the more liquid B is the hedge
• B, the more liquid coin
• Whichever order gives the better test statistic