hard · Quantitative Finance
An analyst estimates the hedge ratio using OLS but finds that the residuals are heteroskedastic.
How does this affect the Dickey-Fuller test for cointegration?
- It has no effect because the Dickey-Fuller test only looks at the sign of the changes.
- It can lead to incorrect p-values and false conclusions about stationarity if not corrected.
- It automatically proves the series are cointegrated.
- It implies the hedge ratio β is biased and inconsistent.
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