medium · Quantitative Finance microstructure-arb
A trader uses a 'Two Standard Deviation' entry rule for a pairs trade.
If the spread is normally distributed with mean 0 and standard deviation 1.5, at what spread levels should the trader enter a position?
- Only when the spread reaches +1.5.
- When the spread reaches 0, indicating a perfect hedge.
- When the spread is > +3.0 or < -3.0.
- When the spread is between -1.5 and +1.5.
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