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Cointegration vs Correlation: The Basis of Pairs Trading
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ticker lesson
Breakdown
0:00lesson
Correlation vs cointegration
- Correlation shows assets move together
- Cointegration shows long-run relationship
- Assets drift apart but return to normal
0:22lesson
Cointegration in statistical arbitrage
- Quants look for cointegrated pairs
- Spread widening triggers trade
- Long cheaper, short expensive
0:43lesson
Cointegration is not permanent
- Relationships break over time
- Markets and industries change
- Quants test continuously
1:04lesson
Statistical arbitrage testing
- Strategy built on cointegration
- Need to test continuously
- Explore E-Patt by Quantinsti
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