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Pair Trading
quant 1
edited
Pairs Trading

From the following link, if someone can make me understand the relevance and syntax of the following lines in this code
https://www.quantopian.com/algorithms/5667083d2a37e94ced000198 . If there is any reference ,please show me the link.

new_spreads = np.ndarray((context.num_pairs, 1))
new_spreads[i, :] = Y[-1] - hedge * X[-1]

    if context.spread.shape[1] > context.z_window:  
        # Keep only the z-score lookback period  
        spreads = context.spread[i, -context.z_window:]

What are Y[-1] ,X[-1]? and z.window ?

Thanks in advance.

1 response
Michael Han

Without really knowing the context (the notebook did not open), it would appear that the "new_spreads[i,:] = ..." is taking the last data point (the [-1]) and applying a beta hedge to it. The z_window appears to be a preset constant that defines the "window" for the calculation of the z-score, i.e. the number of periods back that is used to find the distribution and calculate the z-score that is used as the threshold for trading signals.

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