Tuesday, July 10, 2012

Joint Distribution of Coke and Pepsi Stock Returns

For fun, Corrections displays the joint distribution of daily Coke and Pepsi stock returns from 1990 to present, from two different angles (click to enlarge).
We might also graph the joint distribution of what Coke's daily return was yesterday against what Pepsi's return is today, in the hopes that we can generate an actively-managed portfolio that buys and sells Pepsi based on Coke's conditional return (click to enlarge):
No such luck.  The two are slightly negatively correlated, with a slope of 0.01% return and an insignificant coefficient (even without correcting for serial correlation).  Note that while concurrent returns are moderately positively correlated, the two have no forecasting power for one another.


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