Case Study - Building a Quantitative Strategy from Scratch › Key Parameters

The key parameters for the pairs trading strategy are:

• Lookback ($w$): Window size (60 days) for rolling statistics used to normalize the spread.
• Entry Threshold ($z_{\text{entry}}$): Z-score magnitude (2.0) triggering trade entry.
• Exit Threshold ($z_{\text{exit}}$): Z-score magnitude (0.5) triggering trade exit.
• Stop-Loss ($z_{\text{stop}}$): Z-score magnitude (3.5) triggering forced exit to limit losses.
• Hedge Ratio ($\beta$): The ratio of Stock A shorted for every unit of Stock B bought (or vice versa).
• Transaction Cost: 10 bps round-trip cost assumed for modeling slippage and commissions.