13. Cointegrations and Common Trends

  1. Ngai Hang Chan

Published Online: 28 JAN 2011

DOI: 10.1002/9781118032466.ch13

Time Series: Applications to Finance with R and S-Plus, Second Edition

Time Series: Applications to Finance with R and S-Plus, Second Edition

How to Cite

Chan, N. H. (2010) Cointegrations and Common Trends, in Time Series: Applications to Finance with R and S-Plus, Second Edition, John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118032466.ch13

Author Information

  1. The Chinese University of Hong Kong, Department of Statistics, Shatin, Hong Kong

Publication History

  1. Published Online: 28 JAN 2011
  2. Published Print: 13 SEP 2010

ISBN Information

Print ISBN: 9780470583623

Online ISBN: 9781118032466

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Keywords:

  • canonical correlations;
  • cointegration;
  • common trend;
  • error correction form;
  • finance;
  • Granger's representation theorem;
  • multivariate time series

Summary

Cointegration deals with the common behavior of a multivariate time series. This chapter follows the approach used in Johansen (1996) and exemplifies a couple of examples in that article to illustrate the idea of cointegration. To carry out inference for cointegrated series, Engle and Granger (1987) make use of the idea of error correction form for a multivariate time series. The chapter explains the Granger's representation theorem with examples. The structure of cointegrated systems and statistical inference for cointegrated systems are considered next. Before embarking on estimation and testing, it reviews a few key results from multivariate analysis, one of which is the concept of canonical correlations. Finally, the chapter presents a data set consisting of 1861 daily observations of the spot index and the futures price of the Nikkei Stock Average 225 (NSA). Recently, the concept of cointegration has found applications in many areas in finance.

Controlled Vocabulary Terms

canonical correlations; multivariate analysis; time series analysis