Its the same thing…
Wanted to note this down before I forget.
One of the main reasons I got interested in Pairs trading is the fact that you are not taking a directional bet in the market, instead, you are taking a bet on the relative performance of two instruments - so basically, we are saying, from where we are now, instrument A will outperform instrument B, since historically they have behaved in a particular way relative to one another.
Now, hold on for a minute.
Isnt that the same thing as saying, lets say, historically some instrument has been at a particular price, now it is trading lower than that, so it has to get back to previous levels? At a conceptual level, are we not talking about the same thing?
Answer: NO. I’m trying to come up with a mathematical explanation for this, will try to post that soon.
1 year ago