[R-SIG-Finance] Number of data points required for Cointigration

[amol gupta]

Paul

You say that ADF is not really stable . I agree. Other options to explore
are

   - Use other unit root and stationarity  test.
   - Use other cointigration tests like johansen tests.
   - Finding PCA and choosing one of the lower variance portfolio and test
   for stationarity.(I need to understand PCA more.)

I will take some time and test these ideas. Have you tried anyone of these?
If yes, please share you experiences.

Thank you for your insights.

On Tue, Jan 27, 2015 at 5:29 AM, Paul Teetor <paulteetor at yahoo.com> wrote:

> Amol,
>
> I don't have a formula or a guideline for determining the number of data
> points. But I can share two experiences.
>
> First, when I traded mean-reverting spreads, I used 3 to 5 years of daily
> data. That's 750 to 1,250 data points. Less data did not work well for my
> spreads.
>
> Second, in my experience, the ADF test was quite unstable. That is, it
> might fail to reject for a while, then start rejecting the null hypothesis
> when the market showed some trending back to the mean. Then it would fail
> to reject again as the market wandered away.
>
> Perhaps smarter people than I have had better luck trading with the ADF,
> but for me, it did not provide a complete answer to the question of
> mean-reversion.
>
> Paul
>
> Paul Teetor, Elgin, IL USA
> http://quantdevel.com/public <http://quanttrader.info/public>
>
>   ------------------------------
>  *From:* amol gupta <amolgupta87 at gmail.com>
> *To:* "r-sig-finance at r-project.org" <r-sig-finance at r-project.org>
> *Sent:* Friday, January 23, 2015 3:24 AM
> *Subject:* [R-SIG-Finance] Number of data points required for
> Cointigration
>
> Hi
>
> I need help in figuring out the length of historical data that I should
> use. I took stock prices(daily close) for two tickers from yahoo(200
> days).I tried finding regression coefficient using PCA and I use 150 points
> for PCA. I find a coefficient Beta.
>
> Now to see whether the spread is mean reverting or not I use ADF. If I use
> 150 point long spread, It comes out to be nonstationary. If I use 200
> points data the outcome is stationary
>
> I again used 200 points to do the PCA and find regression. The spread
> comes out to be non stationary. From all these observation *I think* that
> this is not a stable relationship.
>
> So following are my questions
>
>    - Is there a way to decide length of historical data to use?
>    - Some relationship may be more stable than others. Is there away to
>    quantify it?
>
> Any other insight in this regard will be appreciated(time frame, pairs vs
> basket). I have attached the plot and the script that was used to generate
> the plot.
>
>
> --
> Regards
> Amol
>
> If all the seas were ink,
> And all the reeds were pens,
> And all the skies were parchment,
> And all the men could write,
> These would not suffice
> To write down all the red tape
> Of this Government.
>
>
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>


-- 
Regards
Amol

If all the seas were ink,
And all the reeds were pens,
And all the skies were parchment,
And all the men could write,
These would not suffice
To write down all the red tape
Of this Government.

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