Duration and Data
One of the key challenges in pair spotting is the duration for analysis - how far back do you need to look out to extract pair behavior - finally it boils down to two things: identify the pair, and then look for divergence. We need to understand that without comprehensive tools that can identify divergence signals, we’ll end up ‘guessing pairs’ at some level, which is just gambling.
So we need to have a clear focus on these two aspects. For example, there is nothing to rule out the existence of pair behavior in two instruments across segments. In fact, if we indeed find such a pair, it might be possible to fit in a perfect explanation for the same.
So, the duration is important. Data must be available as well. I have some questions here, for example, if I need to find out the “historic” price ratio of two stock futures, I would definitely need to use different contracts’ prices (June future, July future, etc). Is there some noise we need to eliminate here? I am not too sure.
1 year ago