In this paper a Canonical Correlation Analysis (CCA) is used to test the hypothesis r = r0 against the alternative r r0. Such a test flips the null and alternative hypotheses of Johansen's LR test and can be used jointly with the LR test to construct a confidence set for the cointegration rank....

The Wald test for linear restrictions on cointegrating vectors is compared infinite samples using the Monte Carlo method. The Wald test within the vector error-correction based methods of Bewley et al (1994) and of Johansen (1991), the canonical cointegration method of Park (1992) the dynamic...

In this paper we consider two cases of pairs trading strategies: a conditional statistical arbitrage method and an implicit statistical arbitrage method. We use a simulation-based Bayesian procedure for predicting stable ratios, defined in a cointegration model, of pairs of stock prices. We show...

This paper proposes new, simple, and more accurate statistical tests in a cointegrated system that allows for endogenous regressors and serially dependent errors. The approach involves first transforming the time series using some orthonormal basis functions in L2[0,1], which has energy...

We investigate the direct connection between the uncertainty related to estimated stable ratios of stock prices and risk and return of two pairs trading strategies: a conditional statistical arbitrage method and an implicit arbitrage one. A simulation-based Bayesian procedure is introduced for...