Stack Exchange Network

Stack Exchange network consists of 174 Q&A communities including Stack Overflow, the largest, most trusted online community for developers to learn, share their knowledge, and build their careers.

Visit Stack Exchange

Questions tagged [cointegration]

Cointegration is often used in statistical abitrage as a way to identify how to combine some tradable instrument to obtain a *mean reverting* one.

1
vote
0answers
21 views

Johansen Cointegration Test in R

I know its probably been asked bevor but i just don't get it. I have 2 values (Oil and corn price) and i want to check if they are cointegrated. Bevor that, i have tested if they really are non ...
-1
votes
0answers
16 views

Creating the spread between inverse assets?

I'm fairly new to quant finance/trading, and I've been reading up on material regarding pairs trading. One thing that I'm confused on is pairs trading inverse assets. Say you have an asset that ...
3
votes
0answers
69 views

What is the logic of the eigenvectors of the Johanson cointegration test determining hedge ratios?

Reading Algorithmic Trading: Winning Strategies and Their Rationale, Ernie Chan and there is a short section about the Johanson test for cointegration where it is mentioned that the eigenvectors ...
3
votes
1answer
92 views

Cointegration and Ratio Pair Trading

I'm having some confusion doing Engle-Granger Cointegration test and then trade the ratio. Methodology: Run an OLS fit for A and B price time series without a constant. Therefore, $\hat{Y} = \gamma \...
1
vote
0answers
50 views

Cointegration between daily time series and intraday time series

I am working with time series data of daily prices, and intraday prices. For simplicity sake I will refer to the daily time series as 'A' and 'B', and the intraday time series of the same instruments ...
1
vote
0answers
39 views

Is my coding for my kalman filter off when testing this specific set of pairs?

My kalman filter seems to be off for this specific set of pairs I'm looking at. As you can see, in the kalman filtered linear regression, there seems to be an outlying blue line nowhere near the data ...
0
votes
1answer
55 views

Cointegration on prices or difference of prices

Is it better to run my cointegration tests on prices or difference of prices? Difference of prices are more likely to be stationary so the results of my regression (which gives me the beta for my ...
0
votes
0answers
54 views

Pair trading cointegration

When looking for cointegrated pairs, you assume that times series are integrated of order one and try to find a linear relationship using a regression that makes them integrated of order 0 (I(0)). Now ...
5
votes
1answer
453 views

Does Chan use the wrong state transition model in his Kalman filter code?

In his book, Algorithmic Trading: Winning Strategies and Their Rationale, Ernie Chan shows how to use a Kalman filter to improve the returns of a cointegrated portfolio. Recall that the state equation ...
-1
votes
1answer
88 views

Minimizing variance when searching for Cointegration

This paper by Meucci explains that in order to find a combination leading to cointegration of several series $X$, you have to find the vector $w$ which minimise the quantity $\textrm{Var}(w'X)$. I do ...
0
votes
0answers
73 views

How to impose different restrictions on different cointegrating vectors in R?

I'm quite new here and there is a lot of question about the Johansen type cointegration test with the package urca in R. However, it still not clear to me how one can impose different restrictions on ...
0
votes
0answers
33 views

Cointegration in Microstructure models

This is from :One Security, Many Markets: Determining the Contributions to Price Discovery Author(s): Joel Hasbrouck Pg 1180-1181 There are assumed to be n price variables closely related to a single ...
0
votes
0answers
57 views

looking for mathematical technique to predict reversion or trend at the end of a cycle

I have a pairs trading algorithm, and at the end of the cycle, the pair is either going to revert or diverge to/from the trend line. When the cycle is smooth, it reverts, when there is some ...
-1
votes
1answer
205 views
1
vote
0answers
37 views

When constructing a cointegrating series, does choosing the linear regression with the lowest ADF test statistic yield the optimal hedging ratio?

Multiple sources say that you should find the optimal hedging ratio between two stocks in a pairs trade by conducting 2 linear regressions (with each stock as the independent variable), and using ...
0
votes
0answers
31 views

Instruments cointegration: how to handle negative slopes

I'm making research on the simple cointegration trading strategies - simply trading on reverting spreads to mean. Approach. I'm finding two instruments with high correlation (let's call them X and Y)...
2
votes
2answers
96 views

Are there any papers about cointegration consisting of time series of more than two assets?

Are there any papers about cointegration consisting of time series of more than two assets ? I wonder if there could be any trading strategy for three assets case.
1
vote
2answers
246 views

Cointegration vs combination of returns

Hi Quantitative Finance, I understand that there are a wealth of pairs trading models out there. Recently, it got me thinking as to why we go through the trouble to find cointegrated pairs while we ...
1
vote
0answers
225 views

Cointegration and pairs trading

I have intuition that cointegration between elements of pair of equities somehow contradicts pairs trading strategies. Because the better is linear fit of the model the less opportunities we have for ...
3
votes
0answers
56 views

Spurious regression between two futures with the same underlying highly correlated (cor=0.9)

analyzing the correlation between soybean and soybean meal futures in ECBOT, and making a linear regression in R between them I check with an ADF Test that the residuals are not stationary, so ...
1
vote
1answer
373 views

Looking for materials regarding Pair Trading [closed]

For my master thesis, I wish to work onto Cointegration and Pair Trading. I was wondering if any of you had some scholar/blog material recommendations. Best Regards
4
votes
0answers
128 views

Why does the presence of cointegration solve the problem of spurious correlation? [closed]

Many of us are familiar with the connection between spurious correlation and its relationship to cointegration. Granger explains in his seminal 1974 paper "Spurious Regressions in Econometrics" how ...
3
votes
1answer
204 views

How do you decide what time frame you're going to use when testing for cointegration?

I've been fiddling around with different time frames when doing tests for cointegration between two timeseries, and I've realized that the dates that you use for your start/stop of the test will ...
-1
votes
1answer
496 views

pair trading cointegration - calculating shares quantities traded, portfolio value and returns

I have a trading strategy based on the cointegration of X and Y where beta derived from the regression is 0.7. My initial capital to invest is 1000. My understanding that the quantities of X and Y to ...
1
vote
2answers
165 views

Does cointegration contradict the market efficiency?

It is generally assumed that market prices follow random walks, implying market efficiency. However, one could find that some combinations of the "random walks" are cointegrated. Does this ...
0
votes
1answer
43 views

Simulating Co-Integrated Assets

I know how to simulate correlated returns, but I do not know how to simulate Co-Integrated assets. I would like to simulate a co-integrated time series where the Beta Co-Efficient is not constant, but ...
2
votes
3answers
780 views

Cointegration pair trading - how to test a trading rule using Monte Carlo?

I am doing a research exercise where I have two price series $X_t, Y_t$ which I regress against each other and test for cointegration. Once I confirm that they are cointegrated (using CADF or ...
1
vote
2answers
107 views

Co integration of diverging time series

I have 2 time-series datasets. I am trying to find co integration between them. Now the thing is they are negatively correlated. So if I want to look at the distance between them, would I be right in ...
1
vote
1answer
63 views

How do I test if my betas form a co-integrated vector?

I have identified a model using principal component regression where $Y_t$ is explained by 4 factors such as: $$Y_t = \beta_1 X_{1t} + \beta_2 X_{2t} + \beta_3 X_{3t} + \beta_4 X_{4t} + \epsilon_t$$ ...
1
vote
0answers
83 views

how to mix trading signals for the same product?

I have multiple trading signals developed using cointegration on the same stock using various correlated assets. Is there a mathematical way to combine them to achieve better entry/exit points and ...
1
vote
0answers
407 views

Cointegration for forex using ARMA model to forecast the spread

I am working on an automatized quantitative strategy that use cointegration in Forex. I am backtesting this strategy in Python. Please see below the python file: https://drive.google.com/file/d/...
2
votes
0answers
324 views

cointegration strategy

If it can be proved that two time series $$S_t^1=\alpha + \beta S_t^2 + \xi_t$$ representing stocks are correlated, with $\beta=-2$ and then are proved to be cointegrated, how a portfolio should be ...
2
votes
0answers
398 views

Johansen cointegration test interpretation in R

I want to test my time series for cointegration using the Johansen test in R. I got the following result and so I know now that at least 5 out of 9 of my time series are cointegrated. My question is, ...
1
vote
0answers
74 views

Problem with overlapping data when testing futures market efficiency

In my case non-overlapping data would represent the scenario where futures prices (3 months) do not correspond to the futures spot prices in terms of delivery date. For example, futures settlement ...
1
vote
0answers
88 views

Estimating Daily Dynamics using Hourly Data

This article gives a nice outline of how daily data can be used to estimate cointegration on a monthly horizon. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1404905 I'd like to use the same ...
2
votes
0answers
180 views

Assets cointegration: optimal inventory for futures market

I'm interested in HFT cointegration stratagies, and recently found interesting article "Algorithmic Trading of Co-Integrated Assets" The article describes mean-reversion strategy for N-assets. ...
11
votes
2answers
571 views

Imposing Restrictions on Cointegrating Vectors, R example

The code given below estimates a VEC model with 4 cointegrating vectors. It is a reproducible code, so just copy and paste into your R console (or script editor). ...
2
votes
0answers
37 views

Specifying integration level of time series [closed]

Following model was estimated on 200 observations. How to specify the level of integration of $X_t?$ In brackets there are standard errors and p-value of Breusch-Godfrey test is also shown. $X_t=0,02+...
9
votes
2answers
1k views

What does the cointegration coefficient represent in pairs trading when cointegrating log stock prices?

In Pairs Trading by Vidyamurthy, on page 83 (and throughout the book), the author describes an elementary example of trading with log prices. The long run equilibrium of the basic portfolio is given ...
2
votes
1answer
335 views

Pair trading based on cointegration - equity line

I'm preparing a project at my Uni where I have to make a simple pair trading strategy using cointegration between two stocks. I'm stuck on the equity line calculation. I have prepared opening and ...
1
vote
1answer
2k views

Interpretation of Johansen cointegration test in R

I am using urca package of R for Johansen Cointegration test in 2 stocks datas( A and B. My question is very elementar, but have cause some problems for me. How I interpret the critical values, for ...
0
votes
1answer
734 views

Johansen test on two stocks (for pairs trading) yielding annoying results

I hope you can help me with this one. I am using cointegration to discover potential pairs trading opportunities within stocks and more precisely I am utilizing the Johansen trace test for only two ...
3
votes
2answers
927 views

How to select optimal look back period for statistical arbitrage?

Is it possible to estimate the optimal look back period for OLS from which we test if residuals are stationary? Almost all papers that I read use random look back periods of 100 days, 252 days, 500 ...
1
vote
1answer
429 views

Cointegration tests: how do you accurately test the necessity of time trends in the Johansen and Engle-Granger Test?

Is there a correct and up to date procedure? I just run the equation in VEC form and test the significance of the time trends? What are the possible problems that I should be aware of?
1
vote
0answers
98 views

Cointegration and variance of time series

Given that $X_t , Y_t$ are two cointegrated random processes, what can we say about the relationship between variance of the two increments $var(X_{t+h}-X_t)$ , $var(Y_{t+h}-Y_t)$ for a given $h>0$...
1
vote
1answer
144 views

Different ways to identify a co-integrated series?

I have been reading and trying out stuff until I am totally confused and back to square one. Could someone please explain the difference between the two methods suggested below? Suppose I have 10 ...
1
vote
1answer
859 views

matlab interpretation of johansen cointegration test

I need some help understanding the results of Johansen Cointegration test run on MATLAB. I am quite new to econometrics and do not fully comprehend what MATLAB has come up with. I would be really in ...
2
votes
3answers
1k views

Dou you have an example of implementing Engle-Granger 2-step cointegration?

Does anyone know where to find an example of implementing Engle-Granger 2-step cointegration? Python's ideal, but any language will do. I've skimmed and read many articles, but understand little ...
1
vote
0answers
888 views

Cointegration Test: Residual is stationary but not random?

I am testing cointegration relationship on various pairs of stocks by this following these steps. Test for I(1) on a pair of stocks, says X and Y, using Dickey-Fuller test. If both time series are ...
0
votes
1answer
837 views

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) ...