Mean Reversion and Statistical Arbitrage › Key Parameters
Michael BrenndoerferDecember 27, 20251 min read
Quantitative FinanceAll chapters Part 11 of 15Quantitative Trading Strategies
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The key parameters for the pairs trading strategy are:
- Lookback Window: The historical period used to estimate the hedge ratio and spread statistics. Shorter windows adapt faster but are noisier.
- Entry Threshold: The z-score level (typically ±2.0) that triggers a trade entry.
- Exit Threshold: The z-score level (typically 0 or ±0.5) where the position is closed.
- Stop Loss Threshold: The z-score level (typically ±3.0 to ±4.0) that triggers a forced exit to limit losses.