This article is based on the paper ‘Pairs trading with partial cointegration’ (Clegg & Krauss, 2016). I am going to describe Partial Cointegration (PCI) model presented in the paper, explain how to estimate its parameters and implement a trading strategy based on it. I will backtest the strategy both on synthetic and real data and compare its performance to a basic cointegration-based strategy.
Pairs trading with partial cointegration
This article is based on the paper ‘Pairs trading with partial cointegration’ (Clegg & Krauss, 2016). I am going to describe Partial Cointegration (PCI) model presented in the paper, explain how to estimate its parameters and implement a trading strategy based on it. I will backtest the strategy both on synthetic and real data and compare its performance to a basic cointegration-based strategy.