we have shown that with a delta ratio of 1:1 we cannot reject the null hypothesis it doesn't co-integrate, but couldn't we have used CADF to find the delta ratio that does.
I think I'm missing the point of this exercise… thanks for assisting
Hello Alex,
The ratio 1:1 is taken as underlying for both CL and BZ is crude oil. For other instruments that have different underlying assets, perhaps calculating a hedge ratio that changes with time would be a better idea. Here it doesn't make sense as we're essentially talking about the same thing which is oil.