This is great work. I think I agree with you. Co-integration should break down if something has changed fundamentally in the relationship. You can imagine that might happen between two stocks over 10 years. So it is more important that they are co-integrated in past 1 year or 2 years. But I don't think the PTF real time co-integration is calculated like that. It seems much more fluid, changing every day. Almost as if using the same look back as correlation. If it was using 2 year data it won't walk 10% because the ratio is getting a little off. If Jared can add the same chart as correlation over time that would be great. In the meanwhile maybe I run it on two computers, one using 2 year data and one using 3 month data...I don't know....
Hi Guys, Jared has an upgrade to 3.01 that has corrected some of the bugs...its 3.03. Much more stable...
I haven't seen one yet. Also got feedback from Jared that he is now thinking that shorter time-frames for cointegration make more sense for trading. Kevin
Kev how shor did he suggest. I've been doing test for five years and evtered a bunch of trades over the last few weeks. My resoning is that I am looking for pairs with solid historical cointegration. Nick
Well, the shortest you can go with PTF is 1 year. If the average trade is 8-15 days, then a 252 day look-back (1 year) would probably be fine. Personal thoughts here (currently unsupported by backtest data) is that long term cointegration is secondary to short-term. Having both is good but I want to know that the pair has a high cointegration NOW rather than over a long time frame. Just some random thoughts that need to be tested before trading.
This is one of the best pair trade forum i have come across. keep up the good work everyone. just want share the idea here as well... SHORT - EXPD LONG - UTIW any thoughts?
There are really two time factors for a cointegration test. The first time frame is simply the length of historical data used for the test. For example, last n days or years. The second time factor is the lag value used to conduct the test. In theory, this lag value (aka, half-life) should represent the half-life of the mean reversion cycle. The lag is either user-defined as a single value, or more advanced software may iterate and report results across a range of lag values. <i>Interpreting the lag value along with the significance statistic is very important. </i>There are resources on the web to learn more about this. Now, if I were to abruptly wake you up in the middle of the night and ask you to explain the lag variable, you should be able to provide a complete answer without hesitation. Until you can do that, don't trade mean-reversion strategies.