The Bank Nifty – ICICI Bank Pair

We defined the spread between a pair to be:

spread = A – βB

where A and B are prices and β is the first regression coefficient.

The β is also known as the hedge ratio.

Neither β, nor the relationship is “guaranteed” to be stable. Here are the p-values and β of Bank Nifty vs. ICICI Bank nearest to expiry futures, with a 50-day look-back:

BANKNIFTY - ICICIBANK p-value and beta 50

As you can see, the spread has periods of stability and adjustment. And sometimes, the stability is the anomaly.

To be continued…

Comments are closed, but trackbacks and pingbacks are open.