What is a pairs trading half-life?
When two related stocks drift apart, a pairs trader bets that the gap will close. The pairs trading half-life measures how long that usually takes. In other words, it is the number of days the pair needs, on average, to close half of the gap. A short half-life means the pair snaps back quickly, so your capital is tied up for days. A long one means a slow recovery and a long wait for your profit.
Our April post proposed a screen built on this measure.
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