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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Such tests should always be done using adjusted prices. In fact, ideally, you should reconstruct your own price series using the total returns series. To see this, suppose you have a 10:1 split rather than a relatively small cash dividend. Then it is clear that the cointegration relationship can only hold with respect to the adjusted series.
answered Oct 24, 2011 at 20:12
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$\begingroup$ Thanks Tal. What do you mean by 'Total returns'? $\endgroup$– FreewindOct 25, 2011 at 6:48
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$\begingroup$ @Freewind investopedia.com/terms/t/totalreturn.asp#axzz1bmKQrATU $\endgroup$ Oct 25, 2011 at 8:01