Final_1.pdf
Inference 1: In a cointegrated system with two time series, the innovations sequences derived from the common trend components m ...
It therefore follows that the cointegration coefficient may be obtained by performing a simple regression of one innovation sequ ...
theory (APT) and establish a link between APT and the common trends model. This will be the focus of the discussion in the follo ...
specific component in the common trends model. For the correspondence to be valid, the integration of the specific returns must ...
The common factor returns for the stocks are therefore Thus,. The innovation sequences of the common trend are identi- cal up to ...
Again notice that if the stocks are cointegrated, then becomes zero, because is zero. Therefore, when the stocks are cointegrate ...
must be perfectly correlated. We also established that the common factor re- turn of the APT model might be interpreted as the i ...
Calculating the Cosine of the Angle between Two Vectors It is useful at this point to define the inner product of two vectors. G ...
We now scale each vector by dividing every element in the vector by the length of the vector. Denoting the unit vectors in small ...
(6.22) This completes the geometric interpretation. Reconciling Theory and Practice So far we have established the basis for the ...
rather tall order and is seldom satisfied in practice. Unless the stocks are class A and class B shares of the same firm, it is ...
ponent increases linearly with the trading horizon, then, all things being equal, having a shorter trading horizon is definitely ...
Step 1: Calculate the common factor variance and covariance. (sqrt(.2099) is the volatility, 45.8% (volatility of 41.3%) (volati ...
expAB= [1 1] – 1.1032 ×[0.75 1] = [.1726 –.1032] expAC= [1 1] – 1.1613 ×[1 .75] = [–.1613 .129] Step 5. Calculate the common fac ...
Therefore, even on a signal-to-noise ratio basis the stock pair (AB) does bet- ter than stock pair (AC). Notice that having a hi ...
APPENDIX: EIGENVALUE DECOMPOSITION Consider a scalar land a corresponding vector v. They are an eigenvalue, eigenvector pair of ...
104 Introduction In Chapter 6 we discussed the process of choosing potential stock pairs. In this chapter we will focus on wheth ...
(^1) There is a one-step test for cointegration originally proposed by Johannsen, which I do not discuss here. However, referenc ...
We now go back to our original question. Knowing that we are dealing with systems that are not exactly cointegrated, how do we a ...
do such premiums exist in real life? As a matter of fact, stocks do trade at a premium for a variety of reasons. Greater relativ ...
«
1
2
3
4
5
6
7
8
9
10
»
Free download pdf