Dude, just give me the cointegration percentage

Posted by on Oct 18, 2011 in ArbMaker News! | 4 Comments

Robert Engle III

Clive Granger

“Dude, you can get cointegration measures from at least 4 different products and services on the net – and they all boil it down to a single percentage for me.”

If that’s your view, please go back and check that percentage carefully. Cointegration cannot be usefully reduced to a single number. If you are relying on that percentage and calling it cointegration what you likely have is the result of a statistical test called the Augmented Dickey Fuller (ADF) test. Don’t take our word for it: ask the provider of the stat what’s behind it.

An ADF test is not by itself a test for cointegration. Happily, at least one of those services does at least describe the ADF method they are using as a probability that a pair is cointegrated (which is also an arguable contention).

This is a very, very important distinction. Cointegration tests require analysis of residuals (see our glossary for the definition if needs be). For example, ADF testing the pair JOYG/DV returns an alleged cointegration of over 96% according to promoters of this method (with the number coming direct from one of their services). Sounds fantastic!

Unfortunately, JOYG and DV are not, in fact, anywhere near cointegrated – which a test of the residuals using the Engle Granger method would show. And that’s the case over the last year, 2 years, 3 years, 4 years, 5 years, 6 years, 7 years, 8 years, 9 years and 10 years. Earlier data is not available.

There are many ways to skin a cat. A service that talks about cointegration based on a single figure might still be making a great overall tool for its users. But it won’t be one that uses the cointegration analysis invented by Nobel Laureates Mr Engle and Mr Granger.

4 Comments

  1. Thomas Martin
    November 10, 2011

    Does you software work on forex

    Reply
    • Admin
      November 10, 2011

      It should – we modified the code structure on tester request for forex during the beta and we begin testing with it in the next couple of weeks.

      Reply
  2. Carol
    August 9, 2012

    Do you have any plan to develop an API for MT4 platform? It would be a nice feature if I can integrate your tools for fully automated trading at MT4

    Reply
    • Admin
      August 9, 2012

      Hi Carol.

      Yes, this is a priority for us. We are aiming to have a bridge to MT4 by mid-September.

      Regards,

      ArbMakerPlus Info

      Reply

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