Pairs trading is a market neutral mean-reversion trading strategy that involves matching long and short positions in highly correlated securities. In addition to correlation, pairs trading requires a general understanding of stationarity, cointegration, and the risk factors affecting each stock within a pair.
In part 1, we will go through the process of choosing a target sector, locating a cointegrated pair, and then testing the price ratio and spread of the pair for stationarity.
In part 2, we will design a relative value trading strategy that uses rolling averages to take advtange of deviations from "true" mean of their price ratio
In part 3, we will construct a function that simulates our trading algorithm and then explore the results in light of other pairs / benchmarks.
