Co-integration and Statistical Arbitrage

First, Two Light (But nice) Expositions

Michael Murray, "A Drunk and Her Dog: An Illustration of Cointegration and Error Correction," American Statistician, (48), 37--39, 1993

Aaron Smith and Robin Harrison, "A Drunk, Her Dog, and A Boyfriend: An Illustration of Multiple Cointegration and Error Correction," Department of Economics, University of Canterbury, NZ, 2004.

Next, Words from a Nobel Committee and a Prize Winner

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2003: Information for the Public

This is an introductory essay on the contributions of Clive Granger and Robert Engle to econometrics and the work that led to their sharing the 2003 prize. It primarily addresses the GARCH model and the co-integration paradigm (together with its relation to "causality").

Clive W.J. Granger, "Time Series Analysis, Cointegration , and Applications " (January 1, 2004). Department of Economics, UCSD. Paper 200402.(

The text of the speech given by Clive Granger on the occasion of the Nobel Prize Awards 2004. It contains both a succinct description of the work for which he received his prize and interesting autobiographical information.

Then, A More Advanced Primer (Oxymoron?)

Dickey, D.A., Jansen, D.W. and Thornton, D.L, "A Primer on Cointegration with an Application to Money and Income" (Federal Reserve Bank of St. Louis)

This primer starts off gently enough, but it eventually digs into material that is more advanced than our course can cover. Still, it is worth a peek.

Finally, Resources on Statistical Arbitrage

Sudak, D. and Suslova, O. "Behavioral Statistical Arbitrage" Program in Banking and Finance, University of Lausanne.

This survey paper is a generally useful resource. In particular it gives a survey of some well-know hedge fund strategies, as well as a survey of classic (and not-so-classic) market "anomalies." It can be read in conjunction with the material on stylized facts.

De Souza, C, and Gokcan, S. "Hedge Fund Volatility: It’s Not What You Think It Is" AIMA Journal (Sept 2004)

This is not a water-tight exposition, but it is still useful if taken casually and used mainly for what it tells one about he structure and concerns of the hedge fund industry.

Banking 2000

This is a legitimate (if squishy) commercial pitch on co-integration, stat-arb, and index "enhancement." I could give a zillion links to illegitimate sites, but (a) I don't want to boost their google rank and (b) I don't want to get sued for what I might say about them.

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