Cointegrated Pairs Trading
Overview
Cointegrated Pairs Trading is a trading model based on the assumption that the prices of two assets are
Cointegrated.
More specifically, given prices {% p_a %}, {% p_b %} for assets {% a %} and {% b %},
it is assumed that there is a linear combination of the logarithms of the prices that
is
stationary
That is, there is a {% \gamma %} and {% \mu %} such that, {% \epsilon_t %} defined by
{% log(p_{at}) - \gamma log(p_{bt}) - \mu = \epsilon_t %}
is stationary.
Justifications
Selecting Pairs
Trade Strategy
