Quantopian's community platform is shutting down. Please read this post for more information and download your code.
Back to Community
Johansen Test Eigenvectors question (Pairs related)

Hi,

I'm trying out different methods of calculating the spread of a pair. Normally I would use the beta output from an OLS regression in my calculation: "StockA - StockB * beta".

Now I' trying out the Johansen test for cointegration and I'm unsure how to use the eigenvectors to form my spread, should oth of my prices be multiplied by the eigenvectors ?

Help would be greatly appreciated .

A

2 responses

@Anthony,
Don't fully understand this, yet interesting topic!

Here is a blog article I'm reading...sez that :

Returning to the output of the Johansen test, the reported eignevectors are our hedge ratios.

https://robotwealth.com/practical-pairs-trading/

And here is an old Q post that has code in it...though not validated or discussed further.
https://www.quantopian.com/posts/micromanage-pair-trading-algorithm

alan

Thanks Alan. I came across an great example of how to use the eigenvectors in Ernie Chan's Algorithmic Trading book.

A