Cointegration between ViacomCBS Inc (VZ) – Omnicom Group Inc (OMC)

In the context of pair-trading buy / sell, the cointegration relationship between two historical series lends itself very well.

In the context of pair-trading buy / sell, the cointegration relationship between two historical series lends itself very well.

For such a strategy, the case of the ViacomCBS and Omnicom shares, both under the sector index of S&P500 Communication Services and operating in the mass media industry, proves to be an excellent suitor.

There is a long-term equilibrium relationship between them: any deviations of this equilibrium relationship are of a transitory nature (stationary processes) and, as such, destined to be reabsorbed in a short time, as shown in the first figure where the trends of the daily returns of the two shares in the period 2006-2021 are represented.

As we can see, there is some form of relationship although both are basically random-walk and unpredictable.

Confirmation of the cointegration is given by the analysis of the market value of the two series, given by the difference in the daily closing prices of the two series.

The market value is stationary, confirmed by the Adf test, which assesses the null hypothesis that a unit root is present in a time series sample.

t-statistic = -2,97

The t-statistic of -2.97 which is in between the 1% Crit Value of -3.46 and the 5% Crit Value of -2.87 means that there is a better than 95% probability that these two time series are cointegrated.

By rejecting the null hypothesis of non-stationarity of the market value of the two series, it is in fact possible to obtain statistical indicators, starting from the native historical series of the respective shares and the relative spread, such that their trend takes the form of a sinusoid with mean tending to zero and variance tending to be constant, in order to exploit a mean reverting strategy.