Course Name: Financial Time Series Analysis for Trading, Section No: 6, Unit No: 7, Unit type: Notebook
couldn’t understand the math behind the relationship between JPM-BAC.
also need help in understanding how to derive a conclusion based on linear regression with an example of a simple trading strategy.
Hi Nitya,
In the notebook, the regression model shows a strong relationship (R-squared = 0.816) between JPM and BAC, with JPM’s price moving about 4.22 times BAC’s price changes. Based on the observations, a simple pair trading strategy can exploit deviations: short JPM and long BAC when JPM is above the predicted price, and long JPM and short BAC when it’s below, expecting prices to revert to their mean. This is just a simple trading strategy example for your understanding.
Hope this helps! Please do let us know if you have any further questions.