Stochastic trends and cointegration in the market for equities

Article Abstract:

Studies in the relationship between futures of forward prices and spot prices commonly used the theory of cointegration. A model was used to focus on the issue of cointegration between equity spot and futures markets using the time-series relationship analysis involving the Standard and Poor's 500 index and the index futures price series. It was revealed that cointegration exist between the index, futures price and interest rate as shown by the no arbitrage, cost-of-carry pricing model. Results also indicated that a no-arbitrage concept was reasonable in models of equity markets.

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LW Pretorius

Aug 24, 2009 @ 12:12 pm

Can this effectively be applied to enhance the predictability of likely mean reverting behaviour of co integrated stock pairs?

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Modeling and forecasting cointegrated variables: some practical experience

Article Abstract:

A comparison of forecast statistics was undertaken to determine ways of effectively illustrating and predicting cointegrated variables. The comparison revealed that the forecasting capability of a model dealing with cointegrated variables can be enhanced through introduction of cointegrating limitations. It was also shown that improvement in forecasting is most likely to be attained by models possessing powerful variable cointegration.

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Testing for nonlinear dependence in daily stock indices

Article Abstract:

Nonlinear processes are utilized in predicting stock prices. Nonlinear dependence, or deterministic chaos, was studied using daily prices of the Standard and Poor's 100 Stock Index and the National Assn of Securities Dealers Automated Quotations Systems 100 Stock Index. Three results of research in controlled randomness in stock prices were discussed. The methodologies used were analyzed in connection with financial time series.

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