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Hi,
For a project I am using a Kalman Filter, predicting one assets price, A(t), using a linear regression
A(t) = B(t) * Beta(t) + alpha(t)
so let:
X(t) := cointegration spread (removing alpha) = A(t) - B(t) * Beta(t)
and
Z(t) := spread = A(t) - B(t)
When 2 standard deviations of the cointegration adjusted spread is less than the Bid Ask spread of the assets. How would you go about pairs trading with them? I am guessing it would be using X(t) to trade Z(t). Thoughts?
For a project I am using a Kalman Filter, predicting one assets price, A(t), using a linear regression
A(t) = B(t) * Beta(t) + alpha(t)
so let:
X(t) := cointegration spread (removing alpha) = A(t) - B(t) * Beta(t)
and
Z(t) := spread = A(t) - B(t)
When 2 standard deviations of the cointegration adjusted spread is less than the Bid Ask spread of the assets. How would you go about pairs trading with them? I am guessing it would be using X(t) to trade Z(t). Thoughts?