# Tag Info

19

The standard story (also told by @vonjd) is of "The Drunk and Her Dog". This is based on "A Drunk and Her Dog: An Illustration of Cointegration and Error Correction" (1994). The story is itself based on the standard illustration for a random walk known as the "drunkard's walk". The Dickey-Fuller test is used to check for a unit root. It can be used as ...

11

Two time series $X_1$ and $X_2$ are cointegrated if a linear combination $aX_1+bX_2$ is stationary i.e. it has constant mean, standard deviation and autocorrelation function for some $a$ and $b$. In other words, the two series never stray very far from one another. Cointegration might provide a more robust measure of the linkage between two financial ...

8

The somewhat tongue-in-cheek blog post http://www.portfolioprobe.com/2010/10/18/american-tv-does-cointegration/ includes the example of two classes of shares on the same company. In this case you have two assets that are essentially the same but with a few details different. The buying and selling of these assets will make the prices fluctuate from each ...

5

You should look at Paul Willmott's Frequently Asked Questions In Quantitative Finance. He offers 12 (I think) ways of deriving BS and I think you'll find what you look for there. The cool thing is that you really have many different approaches; one is the classic PDE, one is done using change of measure, one is done using binary trees, and so on.... Really ...

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