Trading in the Presence of Cointegration

Abstract

In this article, the authors design a new trading strategy by using cointegration as a measure of long-term dependencies. They show that the theoretical expected return of this strategy is always positive and illustrate it with four exchange traded funds that track world stock market indexes. The empirical results show that the proposed strategy not only outperforms a buy-and-hold strategy for the individual exchange traded funds but produces positive returns for the worst period of the subprime mortgage crisis (September 2008 through March 2009). <b>TOPICS:</b>Exchange-traded funds and applications, exchange-traded funds and applications, statistical methods, performance measurement