New answers tagged spread
Solution is following: Calculate the spread: spread = log(P1 / P2) Find minimum value of spread: minVal = Min(spread) If minVal < 0 then do transformation for spread: spread = spread + Abs(minVal) + 0.01 Now we have spread with positive values.
My understanding is following: Spread = Log(P1) - lambda * Log(P2) Lambda is the hedging ratio to eliminate market risk Assuming the two securities are cointegrated, if Spread is positive, security P1 is relatively more expensive than P2. As a trader, you might want to consider short P1 and long P2. If Spread is negative, security P1 is cheaper than P2 ...
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