Dude, where’s my mean reversion?

What is the point of knowing cointegration is present if the mean reversion coefficient is unknown?

Huh?

The mean reversion coefficient, denoted by “MRC” in ArbMaker, indicates how fast a cointegrated pair of companies’ prices come back to their long-term mean equilibrium. It is derived from an “error correction mechanism” equation built into the Engle-Granger 2 step method (which is actually 4 steps but that’s another post).

A valid MRC (which in turn validates the cointegration) is negative indicating adjustment by the dependent variable/company back to equilibrium in response to changes in the independent variable/company.

Positive MRC suggests either (i) that you are looking at the independent variable/company or (ii) that although the cointegrated time series may be stationary, it may also be auto-correlated.

Finally, if the cointegrated relationship is stable MRC will be found between the values of zero and absolute 1.

Bottom line: if you don’t know the MRC you don’t know enough about the pair. Saying “Dude, it’s cointegrated!” can be kind of like saying “Dude, it’s a llama!”.