Based on the comments on @Greg's APPL/SBUX pair trade, I tried running that pair through the same algo-code I used on GLD/GDX. I think this backtest can be viewed as a cointegration test - the results are quite volatile and demonstrate that the correlation between the two doesn't imply co-integration.
co-integration != correlation
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@fawce: Interesting post, thanks for sharing.
One might ask what is the difference between correlation and cointegration. While two stocks must be correlated in order for them to be cointegrated, the reverse must not be true. Critically, for stock prices X and Y to be cointegrated, there must exist a beta so that eps = Y - beta * X with eps being stationary (i.e. the resulting line does not trail off into infinity but hovers around the same value).
What I'm a little puzzled by is that I've seen the regression (OLS) to be estimated sometimes with and other times without a Y-intercept. To my mind, estimating with an intercept should do a better job, but when I add an intercept to your code it does not work as well. Anyone has an explanation for this?
P.S.: I also included an adf test which tests whether the resulting spread is stationary but it takes too long to compute and the backtest fails. I think it would be nice if some calls (every couple of days when I run the regression and more advanced test) the algo would be allowed to run for a longer time.
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.
In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.