Hands-On Machine Learning for Algorithmic Trading

Cointegration – time series with a common trend

The concept of an integrated multivariate series is complicated by the fact that all the component series of the process may be individually integrated but the process is not jointly integrated in the sense that one or more linear combinations of the series exist that produce a new stationary series.

In other words, a combination of two co-integrated series has a stable mean to which this linear combination reverts. A multivariate series with this characteristic is said to be co-integrated. This also applies when the individual series are integrated of a higher order and the linear combination reduces the overall order of integration.

Cointegration is different from correlation: two series ...