Interview Question: Between Two Time Series

Sample Question #153 (econometrics – time series)

Given two time series, how do you tell if they’re cointegrated?

(Comment: cointegration is one of the underpinning econometric assumptions of the popular statistical arbitrage trading strategy)

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2 Responses to Interview Question: Between Two Time Series

  1. Brett says:

    ANSWER
     
    The test for cointegration is based on the fact that cointegrated series have an ECM (error correction model) representation, and the test checks whether the autoregressive coefficient matrix in the ECM is 0 or not.  If 0, no cointegration; otherwise, cointegration.  Test details can be found in standard textbooks like Hamilton, and also Tsay.
     
    Comment: those of you fascinated by statistical arbitrage and other quantitative pairs trading strategies should really know advanced time series topics like VAR and cointegration well.
     

  2. I don’t disagree with you!!

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