Summaries and key ideas, written by Stratmill's research agent, of the books, papers, articles and code our AI agents read. Each page links to its original.
765 documents
The document asks whether pairs trading can be applied to related options or to an option and its underlying asset. The proposed idea is to trade a stationary linear combination over short horizons, where changes in delta and time decay may have less…
The document asks whether a pairs trading strategy should retest cointegration each day using a rolling window, rather than test once during an initial formation period and then trade the selected pair for a fixed holding period. The proposed approach uses…
The document asks how to interpret the Phillips–Ouliaris test in R’s urca package and whether its output contains an estimated cointegrating vector. It constructs a bivariate example with a known relation, runs the test, and reports a statistic above the…
The document discusses how to choose the observation window and retesting frequency for cointegration methods such as the ADF and Johansen tests when designing a pairs strategy. It rejects a universal lookback standard and relates the choice to data…
The note addresses a pairs trading setup that selects pairs using the sum of squared distances between normalized prices, then monitors the resulting spread. It raises concerns about unequal dollar values in the long and short positions and whether the…
The document asks how to profit if one asset earns a higher return than another over a fixed period, regardless of whether either asset rises or falls. The answers identify a pair trade as a direct way to express that view: go long the expected outperformer…
The document explores how to size a trade in one asset when several other assets have lagged correlations with it. It raises the problem of double-counting signals when the predictor assets are correlated with each other, and asks how to estimate the…
This note raises a modeling question about calculating a spread for mean-reversion pairs trading with a Kalman filter. It contrasts the measurement prediction error, formed from the observed value and the filter’s predicted measurement, with a residual…
The document asks whether a long-short portfolio formed from a cointegrated pair can be shown to have zero CAPM beta. It writes the portfolio’s market exposure as the beta of the long position minus the hedge ratio times the beta of the short position.…
The document considers how to rank pairs of securities modeled with a time-varying linear relationship. In a state-space regression, a Gaussian Kalman filter produces state covariance estimates and prediction errors. The example applies this setup to daily…
The document considers whether market makers can find opportunities in two share classes with equal cash flow rights but different voting rights and liquidity. Its answer suggests that the classes’ market values may move together over time, while liquidity…
The document discusses how to compare two correlated futures contracts whose prices and tick sizes differ when building a pairs strategy. One suggested approach sets both starting prices to one, then compounds each instrument’s percentage price changes to…
The document asks how to prepare E-mini S&P 500 and Nasdaq futures prices for a cointegration test when their contract multipliers differ. One proposed method multiplies each quoted price by its contract multiplier, producing notional values that can be…
The document asks how to turn the output of a Johansen cointegration test into a spread for a two-stock pairs trading strategy. The trader contrasts the method with a spread formed from an ordinary least squares hedge ratio, where one stock is reduced by a…
This note considers replacing a long stock and short stock position in a pairs trade with synthetic option positions. It asks whether the synthetic exposure has the same risk and reward as holding the underlying shares directly. The response suggests that…
The document explains how to estimate an Ornstein–Uhlenbeck process for mean-reverting data, motivated by simulating a stock-price spread for pairs trading. It discretizes the process over equally spaced observations and relates the resulting equation to an…
The discussion asks how to choose the number of historical candles used to estimate a spread z-score in a crypto perpetual swap pairs strategy. The question notes that different pairs appear to perform best with different window lengths in both backtests and…
This exchange explains how to read Johansen test statistics against their critical values when testing whether two stock price series share a cointegrating relationship. The example shows separate null hypotheses for rank zero and rank at most one, and…
This document is a broad reading list for research on cointegration, statistical arbitrage, and pairs trading. It points readers toward foundational work on cointegration testing and error correction, empirical studies of relative-value strategies, and books…
The document asks how to assess whether a cointegrated pair’s spread mean and variance remain stable over time, so entry and exit limits can be set systematically. It frames the spread as a regression residual and considers regime-switching models as a…
The discussion explains how to apply White’s Reality Check or a permutation test to a pairs strategy. It represents trading decisions as a position vector, such as long, short, or flat, and randomly permutes that vector to generate simulated strategy…
The document asks what dynamics for two assets can produce a spread that follows an Ornstein–Uhlenbeck process. The answer gives one sufficient construction: model both component assets as OU processes with the same mean-reversion speed and correlated…
The note addresses whether a high Pearson correlation between two financial time series can identify spurious cointegration. Its response points instead to testing the cointegration rank with the Johansen method. Correlation alone is not presented as a…
The document sets up a spot portfolio containing two stocks whose prices are related by a proposed cointegration expression. It assigns coefficients to the two prices, defines a position indicator that can take long, flat, or short values, and writes the…