1/1 11m
Quantitative Methods & Risk·Published Statistical Edges
Cointegration & Pair Trades
11 min read
When two random walks share a leash
Cointegration is the statistical property that two non-stationary price series share a stationary linear combination. In plain language: each price wanders, but the spread between them mean-reverts. This is the basis of classical pair trading — short the rich leg, long the cheap leg, capture the spread normalization.
Z-score of pair spread
z_t = (s_t − μ_s) / σ_s, where s_t = log(P_A,t) − β · log(P_B,t)