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 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
464 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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1answer
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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
7k views

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: ...
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2answers
1k 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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4answers
579 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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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
2k 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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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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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 ...