cointegration-analysislisted

# 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 | | Trading use | Momentum/trend signals | Mean-reversion pairs trades | | Failure mode | Breaks in regime changes | Breaks on structural shifts | Two assets can be highly correlated but not cointegrated (e.g., two unrelated uptrends). Conversely, cointegrated assets may have low short-term correlation during temporary divergences — which is exactly when pairs trades are entered. ### Why It Matters - **Pairs trading**: Long the underperformer, short the outperformer, profit on convergence - **Statistical arbitrage**: Systematic mean-reversion on spread z-scores - **Spread trading**: Trade the spread directly as a synthetic instrument - **Risk hedging**: Cointegrated hedge ratios minimize tracking error over t