Market Neutral✓ Mathematical
◆ The PatternLong/short correlated pairs to profit from spread convergence
Pairs trading exploits temporary mispricings between cointegrated securities. The spread = log(PA) − β · log(PB) should be stationary.
zt = (spreadt − μ) / σ → enter at |z| > 2, exit at |z| < 0.5
Cointegration (Engle-Granger or Johansen test) is stronger than correlation — it means the spread is mean-reverting. The Augmented Dickey-Fuller test checks stationarity.
// Interactive — entry z-score and spread convergence
Entry z-score
Regime risk. Structural breaks (e.g. mergers, sector shifts) can permanently break a pair's relationship.
Pattern bridge: Stationarity tests connect to The Toolkit — Hypothesis Testing.