Recently I have looked at some sovereign CDS spreads (of the Nordic countries to be precise) and have tested for cointegration in the levels (i.e. untransformed) and logs of the spreads. Tests indicate that a cointegrating relationship exists between certain pairs.
My questions are: how would one go about setting up a pairs trade (if that is the proper word here) using the cointegrating vector from either the CDS spreads or the log CDS spreads? What would be the difference between logs and levels?
As I understand it, when using e.g. stock prices, if using the stock prices as they are, the cointegrating vector would tell you how many of each stock to buy (when it is time to buy), and using logs, the cointegrating vector will tell you the relative weights in dollars to place in each stock. However, when using CDS contracts, e.g. as the buyer, we commit to making quarterly payments based on the spread, to receive protection (a payout) in case of a credit event. How would this translate into a pairs trading strategy?