What is the core principle behind pair trading?

Identifying stocks with similar price movements Predicting future stock prices based on historical data Exploiting temporary price discrepancies between co-integrated stocks Investing in stocks with high beta values

In the pair trading equation y = M*x + c + ε, what does 'ε' represent?

The intercept of the regression line The beta coefficient of the independent stock The residual or error term of the equation The correlation coefficient between the two stocks

Why is the stationarity of residuals crucial in pair trading?

It ensures that the intercept of the regression line remains constant It allows for the application of normal distribution properties to the residuals It guarantees that the beta coefficient will remain stable over time It indicates a strong correlation between the two stocks being traded

What is the typical trigger for initiating a long trade in a pair trading strategy?

When the residuals hit +2 standard deviations When the residuals hit +3 standard deviations When the residuals hit -2 standard deviations When the residuals hit 0 standard deviations

In pair trading, what does going long on a pair imply?

Buying stock 'y' and selling stock 'x' Selling stock 'y' and buying stock 'x' Buying both stock 'y' and stock 'x' Selling both stock 'y' and stock 'x'