Statistics and Probability Commons^™

Cointegration And Statistical Arbitrage Of Precious Metals, Judge Van Horn

Finance Undergraduate Honors Theses

When talking about financial instruments correlation is often thrown around as a measure of the relation between two securities. An often more useful or tradeable measure is cointegration. Cointegration is the measure of two securities tendency to revert to an average price over time. In other words, cointegration ignores directionality and only cares about the distance between two securities. For a mean reversion strategy such as statistical arbitrage cointegration proves to be a far more reliable statistical measure of mean reversion, and while it is more reliable than correlation it still has its own problems. One thing to consider is …