advanced-algorithmic-trading

171
Figure 12.11: Residuals of the first linear combination of RDS-A and RDS-B
In adf.test(comb1$residuals, k = 1) : p-value smaller than printed p-value
And for the second:
> adf.test(comb2$residuals, k=1)
Augmented Dickey-Fuller Test
data: comb2$residuals
Dickey-Fuller = -3.9846, Lag order = 1, p-value = 0.01
alternative hypothesis: stationary
Warning message:
In adf.test(comb2$residuals, k = 1) : p-value smaller than printed p-value
Since the first linear combination has the smallest Dickey-Fuller statistic, we conclude that
this is the optimal linear regression. In any subsequent trading strategy we would utilise these
regression coefficients for our relative long-short positioning.
12.8 Full Code
library("quantmod")
library("tseries")
## Set the random seed to 123