The paper offers adaptation of cointegration analysis for statistical arbitrage. Cointegration is a structural relationship model that relies on dynamic correction towards the equilibrium. The model is ultimately linear: when relationships are decoupled, the forecast of individual price follows...

We derive parametric tests for the role of the interest rate in specifications based on the firm's optimization problem. These Euler equation and decision rule tests mirror earlier evidence, finding little role for the interest rate. We present a simple and intuitively appealing explanation,...