Cointegration and Correlation in Finance
Within the framework of the financial industry, when representing relationships between assets, correlation is typically used. However, academics have long since questioned this method due to the plethora of issues that plague it. Indeed, it is thought that cointegration is a natural replacement in some of the cases as it is able to represent the physical reality of these assets better. However, despite this general academic consensus, financial practitioners refuse to accept cointegration as a better tool, or even, the lesser of two evils. This interesting bias has led to the creation of the mathematical model referred to as Cointelation which is a hybrid model between correlation and cointegration.
Read more about this topic: Diversification (finance)
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