--- title: "Cointegration or correlation: what is the difference?" description: "Correlation measures whether two prices move together in their daily changes." source_url: "https://www.rupeecase.com/learn/questions/cointegration-vs-correlation" --- Two index prices can trend together while their spread keeps wandering, so the test is on the spread Nifty 50 and BANKNIFTY closes, rebased, from 1 Jul 2025 to 15 Sep 2026, with the z-score of their spread in the lower panel (60 session window, hedge ratio fitted on the whole sample, which a real test must not do). An illustration of the test, not a recommended pair. Source: NSE end of day data, computed by RupeeCase. As of 15 Sep 2026. Correlation and cointegration sound alike. Correlation measures how closely two series move together in their daily changes. Cointegration is a claim about levels: some weighted combination of the two prices is stationary, so the gap between them keeps coming back to a middle value. That difference matters for a pair. Two trending prices, such as two indices that climb with the economy, can show high correlation of returns while the gap between them wanders with no pull back. It looks related on a correlation table and offers no mean to trade toward. The usual test is Engle and Granger. Regress one log price on the other to get a hedge ratio, then test the residual spread for a unit root with an augmented Dickey Fuller test. Use the Engle Granger critical values, -3.34 at the 5 percent level for two series with a constant, not the plain table. Johansen is the tool for three or more series. The chart uses the Nifty 50 and BANKNIFTY closes from the NSE index files. The lower panel is a rolling z-score, which swings around zero by construction, so it cannot prove anything. The test runs on the whole spread. On this sample the daily changes are strongly correlated, yet the Engle Granger statistic sits far above the critical value, so the test does not reject. High correlation did not make this pair cointegrated. Two cautions. The test runs on a past sample, so a pair chosen because it passed has already been fitted to it. And cointegration can break when the relation changes, for example after a change in index rules or composition, so the test needs to be run again on fresh data. **Before you trade.** Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. [Read the SEBI study](https://www.sebi.gov.in/reports-and-statistics/research/aug-2026/study-profitability-of-individual-traders-in-the-equity-derivatives-segment-fy25-fy26-_103835.html) Cointegration or correlation: what is the difference?Correlation measures whether two prices move together in their daily changes, while cointegration asks whether a weighted gap between them returns to a stable level over time. Two series can be highly correlated and still drift apart for good, so a pair is tested for cointegration before any spread is traded. LGo deeper ## Where Learn teaches this. [Go deeperPair trading intuition: correlation is not cointegration8 min, Intermediate](/learn/path-18/module-18-3-pair-trading-intuition)[Go deeperCointegration toolkit: Engle Granger, ADF, half life and z score10 min, Advanced](/learn/path-18/module-18-7-cointegration-toolkit) SSources ## Go to the source. 3 sources, NSE the most cited The publisher of each source listed below. Source: Module undefined source list. 1. [Engle and Granger (1987), Co-integration and error correction, Econometrica](https://doi.org/10.2307/1913236) Paper 2. [NSE, equity derivatives contract specifications (lots, expiries and settlement used in the examples)](https://www.nseindia.com/static/products-services/equity-derivatives-contract-specifications) NSE 3. [SEBI, norms for sharing and usage of price data for educational purposes (30 day lag, from 8 May 2026)](https://www.sebi.gov.in/legal/circulars/may-2026/norms-for-sharing-and-usage-of-price-data-for-educational-purposes_101293.html) SEBI ?Questions people ask ## Related questions. [QuestionWhat is statistical arbitrage?Advanced](/learn/questions/what-is-statistical-arbitrage)[QuestionWhat is pair trading, and is there an NSE pair trading stock list?Intermediate, trap check](/learn/questions/what-is-pair-trading)[QuestionMean reversion or momentum: what is the difference?Intermediate](/learn/questions/mean-reversion-vs-momentum)[QuestionSharpe, max drawdown, Kelly, position sizing and risk of ruin: how do they fit?Intermediate](/learn/questions/sharpe-drawdown-kelly-sizing)[QuestionHow do I backtest an option strategy in India, or in Python?Intermediate](/learn/questions/backtest-option-strategy) [All 130 questions](/learn/questions/) Explore next ## Go deeper on this question. * [QuestionHow do I compute the half life and z score of a pair?A short answer with a dated chart](/learn/questions/pair-half-life-and-z-score) * [ToolOption payoff builderLegs on a dated Nifty chain, breakevens and charges](/learn/tools/payoff-builder) * [GlossaryInvesting glossary, 230 termsPlain word definitions, and the app’s own](/learn/glossary) Community ## Join my WhatsApp group. Scan the code, fillFill one short form, and join my WhatsApp group. Slides, sources, factsheets and the rebalance logs live there, and members join a daily Google Meet with me. New to RupeeCase? [Getting started](/getting-started) [See the terminal](/terminal) [Sign up for RupeeCase](https://invest.rupeecase.com/signup) [Join the WhatsApp group](https://forms.gle/C6HMtM1Z2GfeocQV7) [One form, one group](https://forms.gle/C6HMtM1Z2GfeocQV7)Scan with your phone camera Education only, not investment advice, a research report or a recommendation to buy, sell or hold any security. RupeeCase (QC Alpha Technologies Pvt Ltd) is not registered with SEBI as an investment adviser or research analyst. Contracts and prices shown are for illustration only, come from NSE end of day files at least 30 days old, and are not recommendatory. Derivatives trading carries a high risk of loss.