AdvancedMultiple choice
Two stocks have a return correlation of . Does that make them a good pairs trade?
- AYes – high correlation is exactly what a pairs trade needs
- BNot necessarily – the spread must also be stationary
- CNo, because a correlation that high means there is no spread to trade
- DOnly if the two stocks are in the same sector as each other
The worked solution is in Premium
The answer, the full working and the one idea to take away – for this and all 1,322 questions in the bank. Answer it in practice and your working is marked, with a known mistake named when you make one.
Learn the method
Unit roots, spurious regression and the basis of pairs trading
Reported in interviews at
More time series questions
- Two prices that wander together, part 1 of 3Foundation
- You regress one stock’s price on another’s and get R² = 0.95 with a t-statistic of 40.Applied
- A spread follows Δsₜ = −0.05 sₜ₋₁+εₜ on daily data.Applied
- A spread follows an Ornstein–Uhlenbeck process dX = θ(μ−X) dt+σ dW with θ = 5 per year.Applied
- Two prices that wander together, part 2 of 3Applied
- You have five price series and suspect more than one cointegrating relationship.Advanced