pair-trading

name	pair-trading
description	Use this skill when the user asks about pair trading, statistical arbitrage, cointegrated pairs, spread trading, hedge ratios, or market-neutral strategies.
license	MIT
metadata	{"author":"quantagent","version":"1.0"}
allowed-tools	find_cointegrated_pairs, compute_spread_metrics, run_backtest_tool, detect_market_regime

Pair Trading / Statistical Arbitrage

Overview

A pair trade is long one leg, short the other, betting the spread mean-reverts. The edge comes from cointegration — a stationary long-run relationship — not from correlation. Two stocks can be 0.95 correlated and still drift apart forever.

Methodology

1. Scan within a sector (find_cointegrated_pairs with a sector filter). Cross-sector "pairs" that pass the test are usually statistical accidents; economic linkage (same industry, shared inputs, substitute products) is what makes the relationship durable.
2. Validate the pair (compute_spread_metrics):
   • coint_pvalue < 0.05 — the Engle-Granger gate.
   • half_life_days — expected mean-reversion speed. 5–30 days is tradeable; None or 60+ means the spread doesn't revert usefully.
   • hedge_ratio — units of leg B per unit of leg A for a dollar-neutral-ish spread. Recompute periodically; it drifts.
3. Trade the z-score: enter at |z| ≥ 2 in the stated direction, exit near z = 0 (|z| ≤ 0.5), hard stop at |z| ≥ 3–4 — a spread that keeps widening past 3σ is telling you the relationship broke.

Risks to State Every Time

• Regime breaks kill pairs: mergers, guidance resets, index add/drops, or one leg's fundamental story changing. A p-value from the past year cannot see these coming. Check recent news on both legs.
• The p-value is in-sample; with ~1,700 pairs tested at 0.05, dozens pass by chance. Prefer pairs that are also economically obvious.
• Shorting has borrow costs and squeeze risk that this analysis ignores.
• Size both legs by the hedge ratio, and treat the pair as one position in journal/risk-gate terms (one thesis, one stop in z-terms).

How to Report

1. Lead with the strongest 2–3 pairs: symbols, p-value, half-life, and current z-score with the entry/exit signal.
2. State the trade construction explicitly (long X shares-equivalent, short hedge_ratio × Y).
3. Note in-sample and regime-break caveats — always.