Cointegration is often used in statistical abitrage as a way to identify how to combine some tradable instrument to obtain a *mean reverting* one.
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R Outputs from Johansen test. Linear combination still not stationary?
I am trying to see if house price is cointegrated with interest rate, per capita income and rental vacancy rate and got the following output from ca.jo in R:
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1answer
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How to determine ratios for mean-reverting basket
Suppose I have a basket of 3 securities A, B, and C. I believe that the basket is cointegrated and I want to create a mean-reverting trade. I fit the model:
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Philips-Ouliaris test for cointegration
I'm trying to implement cointegration tests using the R urca package. I've figured out the Johansen test (ca.jo), but I'm having trouble with the Philips-Ouliaris test (ca.po). I have two questions:
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1answer
127 views
Cointegration tests
I'm trying to figure out how to perform cointegration tests in R between 2 time series. I'm using po.test from the package ...
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1answer
114 views
Using cointegration to prove that a long-short strategy is market neutral (in CAPM sense)
I am trying to prove that a long-short strategy invested according to the cointegrated relationship from Engle-Granger's. So essentially I'm trying to show that the return $r_{XY}$ of the portfolio (X ...
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Modelling long run relationship between dividend and earnings
I am working on a paper where I have to model the long run relationship between earnings and dividends. I have downloaded the raw data from shillers website. I have converted the series to ...
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Stepwise Cointegration
This is more of a general question at this point, but if my thought process makes sense I will follow up with an R implementation. I have read a number of papers on cointegration analysis for pairs ...
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1answer
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Pairs trade CDS contracts using cointegration
Recently I have looked at some sovereign CDS spreads (of the Nordic countries to be precise) and have tested for cointegration in the levels (i.e. untransformed) and logs of the spreads. Tests ...
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Alternative ways to understand time-varying comovement between two time-series?
I have been looking into ways to better understand how the dependencies/correlations/etc between two time series can vary over time.
I first thought about using a Kalman/particle filter over a ...
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Lagging Beta Strategy
Came across a method involving pairs in the book Hedge Fund Market Wizard:
Given a Stock(or Collective of instruments)that follows closely to say Dow index with a beta<1(very short term) but ...
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2answers
408 views
Cointegration trading: Ignoring pairs that aren't economically related
Cointegration trading question
What's the state of the art when it comes to choosing proper subsets of stocks/assets where cointegrating relationships aren't ignored as (likely to be) spurious?
For ...
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1answer
388 views
Meta-view of different time-series similarity measures?
While I spend most of my StackExchange time on MathematicaSE, I'm in the business and follow the questions and answers on this site with great interest.
Recently questions like the following (and ...
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1answer
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How to interpret results of Johansen Test?
I have two time-series a & b. The objective is to find out whether two series are cointegrated or not. I am using Johansen Test in R to find this out.
I am using urca package of R.
Here is the ...
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2answers
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cointegration applied to Portfolio Construction & Risk management
There are all sorts of applications of cointegration to generating alpha on mean-reverting timeseries: comparing spot vs. futures, bond spreads, identifying mean-reverting residuals, etc.
But there ...
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2answers
321 views
Entry and exit points for very short mean-reverting timeseries
I have a model specifying a cointegration relationship on a number of transaction-level timeseries.
I would like to specify entry and exit points for trades where these points ideally would be just ...
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3answers
568 views
What are the applications of cointegration?
We have had several posts on cointegration, and I must admit that I have only seen them mentioned here and there but I have no real experience using this concept.
My question is pretty simple: how do ...
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1answer
359 views
Two prices pass the cointegration test but there is a trend. How to check stationarity?
Below is a spread built with two ETFs that pass the cointegration test i.e. Adjusted Dickey Fuller, adfTest(type="nc") in R's fUnitRoots with a p-value < 0.01.
The red line is the trendline.
What ...
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2answers
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Choosing the time-frame to test for cointegration
Is there a technique to choose the time-frame for a cointegration test (eg Augmented Dickey-Fueller's)?
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A gentle introduction to cointegration [duplicate]
Possible Duplicate:
What is the intuition behind cointegration?
Although having a postgrad degree in mathematics, I haven't used any maths 'in anger' for quite a few years now, so I am ...
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1answer
238 views
Is there a measure for the 'degree' of cointegration
Is there a standard (or maybe even intuitive?) way of ranking pairs of cointegrated time series so that one could make statements like the following:
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0answers
324 views
What is the correct procedure to choose the lag when preforming Johansen cointegration test?
When preforming Johansen cointegration test for 2 time series (the simple case) you need to decide the lag you want to use. Doing the test for different lag levels returns different results: for some ...
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How do different methods and techniques used in pairs trading compare?
I was going through the paper of Avellaneda (2008) on stat arb and I found it interesting that he uses asset returns vs. their respective ETFs to compute the s-score.
I am wondering if anyone has ...
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3answers
600 views
How to normalize Futures data(different leverage) for cointegration test?
For example I want to construct 2 time series, one for ES and the other for NQ and test for cointegration.
ES one point equal to 50$.
NQ one point equal to 20$.
If I have the following data:
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1answer
306 views
Should cointegration be tested using close or adjusted close prices?
When doing cointegration tests should I use the adjusted close price or just close price for the time series?
The dividend of each stock is on different dates and can cause jumps in the data.
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561 views
Why does the following data fail my cointegration test?
I have some closing price data for two Australian banks which track each other very closely.
http://dl.dropbox.com/u/12337149/stat/CBA.csv
http://dl.dropbox.com/u/12337149/stat/WBC.csv
Code from ...
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1answer
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How to interpret the eigenmatrix from a Johansen cointegration test?
I ran a Johansen cointegration test on 3 instruments, A B and C.
The results that I got are:
R<=x | Test Stat | 90% | 95% | 99%
r=0 --> 36.7 | 18.9 | 21.1 | 25.8
r=1 --> ...
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2answers
809 views
Why does this Co-integrated basket look too good to be true?
You need quantmod & tseries in R to run this:
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2answers
384 views
Variable Selection in factor models
Let's say you have a dependent variable and many independent variables. What are the preferred metrics for sorting and selecting variables based on explanatory power? Let's say you are not concerned ...
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6answers
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How are correlation and cointegration related?
In what ways (and under what circumstances) are correlation and cointegration related, if at all? One difference is that one usually thinks of correlation in terms of returns and cointegration in ...
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4answers
1k views
Are two identical time series cointegrated?
I did cointegration test on two identical time series, and the result shows that they are not cointegrated, but intuitively, I think they are.
Can anyone share some thoughts on this? Thanks!
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2answers
610 views
How do I incorporate time-variability in a pair trading framework?
Recently I have been looking at pair trading strategies from a cointegration perspective, as described in chapter 5 of Carol Alexander's Market Risk Analysis volume 2. As most quantitative finance ...
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5answers
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What is the intuition behind cointegration?
What is the intuition behind cointegration? What does the Dickey-Fuller test do to test for it? Ideally, a non-technical explanation would be appreciated.
Say you need to explain it to an investor ...
