Examining linearity between two stocks – linear regression and interpreting results.
Read: Relationship between a pair of stocks
How do you conclude that a pair of stocks move together?
Read: Bank Nifty vs. HDFC Bank and ICICI Bank
Correlation, spreads and co-integration.
Read: Finding Pairs to Trade
Hedge ratios, spreads and significance.
Read: The Bank Nifty – ICICI Bank Pair
A pair trading strategy
A simple trading strategy: buy the spread if it is one standard deviation below the average and sell the spread if its is one standard deviation above the average.
Read: Backtesting a Pair Trading Strategy