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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.

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32 votes
6 answers

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 ...
user40's user avatar
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63 votes
6 answers

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 ...
Joshua Ulrich's user avatar
28 votes
2 answers

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: ...
Freewind's user avatar
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26 votes
1 answer

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 ...
silencer's user avatar
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16 votes
5 answers

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!
user avatar
9 votes
1 answer

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 ...
techpaisa's user avatar
2 votes
1 answer

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 ...
Victor's user avatar
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12 votes
1 answer

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. Code from ...
deltanovember's user avatar
8 votes
1 answer

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.
Freewind's user avatar
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2 votes
0 answers

Research papers and other resources to learn about useful statistical tools for pairs trading

Brief background: I recently started writing a Python code to find stocks which might be cointegrated. I iterated over a really long list of stocks trying to find a pair which might be cointegrated. ...
TryingHardToBecomeAGoodPrSlvr's user avatar
1 vote
2 answers

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 ...
Liam Donovan's user avatar