cointegration-analysis
Cointegration Analysis
Cointegration testing identifies pairs of assets that share a long-run equilibrium relationship, enabling statistical arbitrage and pairs trading strategies.
What Is Cointegration?
Two price series are cointegrated when they are individually non-stationary (random walks) but a linear combination of them is stationary (mean-reverting). Intuitively, the prices may wander apart temporarily but are pulled back to an equilibrium spread over time.
Cointegration vs Correlation
| Property | Correlation | Cointegration |
|---|---|---|
| Measures | Short-term co-movement | Long-run equilibrium |
| Stationarity | Requires stationary returns | Works with non-stationary prices |
| Time horizon | Can change rapidly | Stable over months/years |
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