Cointegration Testing

Cointegration testing identifies long-term equilibrium relationships between two or more non-stationary time series. Even if individual crypto assets are non-stationary, a linear combination of them might be stationary, indicating they are cointegrated.

This is the bedrock of pairs trading and statistical arbitrage, where traders profit from temporary deviations from the established long-term relationship. By verifying cointegration, analysts ensure that the spread between two assets is mean-reverting, providing a predictable signal for trading.

It allows for the construction of delta-neutral portfolios that benefit from the convergence of prices. This testing is essential for managing the risk of spread strategies in highly correlated markets.