This paper analyzes whether the system of exchange rate time series of the Japanese yen and the South Korean won is cointegrated by using Engle and Granger's two-step approach to modeling cointegrated processes. The first step involves fitting the long-run relationship in levels by least squares. At a second step, the residuals from the static regression are employed as an error correction term in the dynamic, first-difference regression. Because the hypothesis of cointegration cannot be rejected, the estimated parameters can be considered as elements of the cointegrating vector of this system.
The conclusion of this paper can provide some insights to investors who are interested in foreign exchange markets.