Pair trading is often framed as a statistical exercise: identify a spread, measure its deviation, and trade the reversion. But in practice, the real challenge is not finding divergence – it is correctly interpreting it. This problem is where using sentiment scores in stock pair trading comes in to play.
A widening spread can mean one of two things:
- A temporary dislocation driven by liquidity or noise
- A structural repricing driven by new information
Traditional stat arb models –
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