I think David's application of Kalman Filter in pairs trade is excellent !!!
It is a great idea to smooth the price with Kalman - moving - average Filter first before using another Kalman Filter to find the beta.
But I am a little confused: before all of that, why do we need to log the prices before using the Kalman - moving - average Filter? To smooth the prices?
In addition, I've tried different pairs. Only a few got great results. I am wondering if I need to calibrate the parameters in Kalman Filter for different pairs?
Please advice,
Thanks in advance,
See the link code below:
https://www.quantopian.com/lectures/example-kalman-filter-pairs-trade
Best Regards,