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Cointegration | Open Access Journals
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Journal of Applied & Computational Mathematics

ISSN: 2168-9679

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Cointegration

If two or more series are combined independently (in the sense of time series) but some linear combination of them has a lower order of integration, and then the series is said to be co-integrated. A common example is where the first-order series ({\displaystyle I(1)}{\displaystyle I(1)}) are integrated, but some (co-integrating) coefficients form a stationary linear combination. A stock market index, for example, and the price of its corresponding futures contract, change over time, each approximately following a random march. Testing the hypothesis that there is a statistically significant correlation between the futures price and the spot price may now be achieved by checking the presence of a two-series co-integrated mix. In 1926, Udny Yule was the first to present and examine the idea of false-or nonsense-regression. Before the 1980s, many economists used linear regressions on non-stationary time series results, which Nobel laureate Clive Granger and Paul Newbold demonstrated to be a dangerous approach that could generate a spurious correlation.

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Citations: 1282

Journal of Applied & Computational Mathematics received 1282 citations as per Google Scholar report

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