Chapter 6 · Section 3 practice

Cointegration and Pairs Trading

0 of 3 answered

These questions review the examples in the companion slides. Choose an answer, then check the explanation.

Question 1

Apple 2015–24 on Dow 1985–95, 2 516 rows each. What will R² and the t-statistic look like?

  • R² ≈ 0, t ≈ 0 — unrelated series
  • R² ≈ 0.05, t ≈ 2 — mild chance correlation
  • R² ≈ 0.3, t ≈ 5
  • R² ≈ 0.8, t > 100 — a “highly significant” fiction

Question 2

You run a plain ADF on the OLS residual and get p = 0.024, but coint() reports p = 0.080. Which is right?

  • ADF — coint() is just ADF with more decimals
  • coint() — the residual’s β was estimated, so the critical values must be harsher
  • Neither — average them
  • ADF, because the sample is large

Question 3

The full-sample test rejects at p = 0.014. Split into formation (first 3 years) and trading (last 2). What do you expect on the formation window alone?

  • The same p ≈ 0.01 — cointegration is a property of the stocks
  • A smaller p — fewer points means less noise
  • A larger p, possibly above 0.05 — the full-sample β used the trading window to fit itself
  • p is undefined without both windows