Finding the Identical Twin

Abstract

In this paper we examine correlation and mean reverting behavior of Dow Jones Industrial Average, with ten stock markets from Asia, Europe and America. Along with correlation test, Augmented Dickey Fuller Test is conducted to test the mean reverting behavior of time series. We found that all the markets are positively correlated with DJIA. We also confirm that high degree of correlation does not result in mean reversion between two time series.

Keywords: Dow Jones, Augmented Dickey Fuller Test, Correlation, Pairs Trading, World Markets, Time Series, Portfolio Management, Hedging, Portfolio Balancing, Risk Management