Articlegreen1999

Optimal hedging using cointegration

189 citations0/0 files storedPhilosophical Transactions of the Royal Society A Mathematical Physical and Engineering Sciences

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

Cointegration is a time-series modelling methodology that has many applications to financial markets. When spreads are mean reverting, prices are cointegrated. Then a multivariate model will provide further insight into the price equilibria and returns causalities within the system. Spot–futures arbitrage, yield–curve modelling, index tracking and spread trading are some of the applications of cointegration that are reviewed in this paper. With the demand for new quantitative approaches to active investment management strategies there is considerable interest in cointegration theory. This paper presents a model of cointegrated international equity portfolios which is currently used for hedging within the European, Asian and Far East countries.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1988Testing for a Unit Root in Time Series Regression 1988Statistical analysis of cointegration vectors 1990MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY 2012The Econometrics of Financial Markets 1997The Econometrics of Financial Markets 1988Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test

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2005Indexing and Statistical Arbitrage 2009Functional-coefficient cointegration models 2008A hybrid optimization approach to index tracking 2005Factor based index tracking 2011Mean–variance portfolio selection of cointegrated assets 2017Sparse Portfolios for High-Dimensional Financial Index Tracking

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