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Yeah same thing, great pair but not cointegrated... e.g., it is highly correlated but the amount of correlation decays as the timescale increases.

The whole problem is that correlation is defined by the instantaneous returns. What time scale? That is up to you. Cointegration is a long term measure, a great example of highly correlated but non-cointegrated pair is SPY and QQQQ

I've created no standard. I never said that it has to be cointegrated to be tradeable, I was simply pointing out that if series are truly cointegrated then they are the 'best' series to trade as the spread is stationary (constant mean and constant variance). Trading based on correlation is...

Yes, it is true, go look at the defintion of 'cointegrated'. Has nothing to do with correlation, as correlation is a very poor measure for modelling co-movements. Things can be very correlated but not be cointegrated.

lol.

Probably because that $7 is way more than the interest would have cost you :) Need a good direct access broker..

Right, but the customer doesnt know that and isnt demanding interesting from the broker...

Why would they have to borrow it if another customer was holding it already?

Right, m is your cointegration coeffecient and b is the intercept.. you probably want to look at the histogram of residuals, skewness, kurtosis, etc

I didn't know any of this shit 6 months ago, it shouldnt take too long to figure out if you dont mind sleeping much. :p natural log, e, yeah The residuals are just the error left over from the line fit. If the pair is stationary, it is good, even if it is not stationary it might still...

vidyamurthy's book is pretty good, but pretty light on implementation details. Stock prices are always going to be non-stationary.. the whole allure of pairs trading is that the spread is supposed to be stationary (in a perfect world), or at best, highly mean-reverting.. 2-stock pairs that...

Doesn't look like a good pair to me.. a good pair would be one where there exist a linear combination such that they trade at some fixed ratio to each other.. with this pair there clearly is no mean and would be called 'non-stationary'. So, there would be no mean and you would probably trade it...

Chaos in the markets, how strange have you found it to be?

Smart move, we need 24/7 markets. I'm completely automated anyway so it doesnt matter to me.

All very good points... I suppose it is useful to have a calendar of expected news releases and to stay out of the market during those times.

I'm talking about even 1/10th of a second into the future.. if you have full book depth, do *all* the bids really disappear at once, or is it more similiar to a very fast avalanche effect? I have a large tick/full depth quote database accurate to the millisecond.. I think I'll spend some time...

That's really interesting.. gaps that is. Have you studied the formation of them? I know most people say they are "instantaneous", but I have a feeling that what they mean is "really god damn fast". I wonder if its possible to develop some sort of gap prediction by analyzing depth of book, order...

How do you guard against gaps? Also called 'jumps' in the literature.. perhaps immediately entering a limit to sell at some price that the stock should never hit accourding to current volatility..but in the case that it does, it would probably be more likely to execute than a stop loss.

Your probably better off just taking the offsetting position in some some ETFs or futures..

Interesting idea, but are the options liquid enough? Also, option pricing formula can get very very complicated, so to find the optimal hedge using the options might not be trivial.