A Drunk and Her Dog: An Illustration of Cointegration and Error Correction

If there exists a stationary linear combination of nonstationary random variables, the variables combined are said to be cointegrated. A humorous example of a drunk and her dog illustrates cointegration much as “the drunkard's walk” illustrates random-walk processes. The example makes clear why using first differences of the variables is a mistaken way to look for linear relationships between potentially cointegrated variables. The example also makes clear the link between cointegrated variables and error-correction models.