I am slightly confused as to whether I should use price spread or ratio for mean reversion in pair trading. I have seen some work on testing stationarity for the price spread and then use the price ratio instead for entry/exit. For example: https://medium.com/analytics-vidhya/statistical-arbitrage-with-pairs-trading-and-backtesting-ec657b25a368

My question is, how does one justify the use of price ratio if we only tested the stationarity of the price spread? Or is it the case that once we know the price spread is stationary, it matters little if we use price ratio or price spread since the price ratio can be regarded as stationary once we know the spread is stationary?

  • 1
    $\begingroup$ Some people work with prices and some people work with log of prices. And it is not always clear which unless you read the articles carefully. A ratio of prices is the same as a spread of log of prices. Choose an approach you like from a source you undesrtand well and stick with it. $\endgroup$
    – nbbo2
    Commented Nov 29, 2023 at 13:03


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Browse other questions tagged or ask your own question.