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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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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1answer
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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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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 ...
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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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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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4answers
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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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1answer
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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
825 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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2answers
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Why does this Co-integrated basket look too good to be true?

You need quantmod & tseries in R to run this: ...
6
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3answers
726 views

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
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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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Co-integration constraints of coint(X,Z) given coint(X,Y) and coint(Y,Z)?

The Augmented Dickey-Fuller Test can be used to measure how well ranked certain pairs are against others for co-integration. So then say we have a known co-integration between ...
5
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3answers
795 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 ...
5
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2answers
696 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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1answer
447 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 ...
5
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0answers
329 views

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 ...
4
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1answer
422 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.
4
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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 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
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Cointegrating relationships - Johansen in R

I read the posts, How to interpret results of Johansen Test? and How to interpret the eigenmatrix from a Johansen cointegration test? But still I am quite confused by the output. I have a project with ...
3
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3answers
779 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: ...
3
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2answers
451 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 ...
3
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1answer
535 views

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 ...
3
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1answer
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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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0answers
429 views

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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1answer
371 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: ...
2
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1answer
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ADF test in R yielding perfect cointegration. How is this possible?

I am using the famous conintegrated pairs tutorial to just different stocks for cointegration. The adf.test yeilds perfect cointegration, which I feel must be incorrect. Here is why: When I run ...
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2answers
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Need help on cointegration

I tried to test stock pairs for pairs trading. There are two questions I am not sure. I am not using ADF to test the log difference between two stocks. But I also see people using Johansen test. ...
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1answer
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Replicating the short part of a long-short trade using inverse ETFs

I devised a pair trading strategy going long XXX and short B*YYY. B is the quantity of shares of YYY I need to short. The problem is I can’t go short on YYY, but there is an inverse ETF for YYY ...
2
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1answer
155 views

Trend in Cointegration relationship

I was estimating a long-run relationship of exchange rate and purchasing power parity. The residual of the long-run relation which should be $I(0)$, but it is only $I(0)$ when I introduce trend in ...
2
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2answers
2k 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 ...
2
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1answer
277 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 ...
2
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1answer
310 views

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 ...
2
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1answer
328 views

Johansen Cointegration Test

I just performed a Johansen Co-integration test on two stocks. The results I get are: ans = r0 r1 t1 true false I am using Matlab. Can ...
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0answers
245 views

What's the practical difference between the Johansen vs Engle-Granger tests for cointegration?

For the two-variable case, what are the practical differences between using the Engle-Granger procedure versus the Johansen test for cointegration? Is one universally more powerful than the other? ...
2
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411 views

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
158 views

High correlation will help detect spurious regression over cointegration?

I'm analyzing two financial time series with Johansen method. A high Correlation coefficient using the Pearson method will help me to detect spurious cointegration models to avoid? If this is not ...
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1answer
122 views

Simulate non-stationary time series with cointegration

how can I simulate/generate two non-stationary time series (with unit root) so that they can be also cointegrated (using R or Matlab). Thanks in advance.
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pairs trading or long short strategy given volatility of the stocks

Suppose I have 2 stocks and the only thing I know about them is their volatility and that they cointegrate. Let's say vol of stock A is 25% and B is 20%. Will I be able to find a hedge ratio only ...
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0answers
136 views

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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1answer
566 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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1answer
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Cointegration results interpretation validation?

Here is how I am interpreting results of a Johansen Cointegration Test and Engel-Granger Test for A and B. The results:(Using matlab) ...
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0answers
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Interpretation of Cointegration results, pValues and t-Stat

This is a follow up to: Cointegration results interpretation validation? I ran another Engel Granger Test on a pair, The results I get: ...
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0answers
82 views

Where can I find ADF library in c#

Where could I find an ADF library or source code in c# for cointegration test?
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Detrending before cointegration

When checking for co-integration , is it necessary to detrend the time series? What is the best way to go about it?
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2answers
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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 ...