easy · Quantitative Finance
Two assets are 'cointegrated'. What does this imply for a pairs-trading strategy that 'correlation' alone does not guarantee?
- One asset is a perfect hedge for the other, thereby eliminating all risk.
- A linear combination of the two prices is stationary and will revert to a mean.
- The returns of the two assets are simply independent and identically distributed.
- The two assets will always move in the exact same direction on any single trading day.
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