Section 8,1 at 5:12 minute, it is said, we alwayd need an economic basis BUT there is not any examples, can you give us the economic basis for this strategy and maybe to another because I'm struggle with that a little bit. Thanks in advance!
Hello Lucas,
In the case of the SPY vs the RSP, the economic basis is the fact that the two ETFs consist of exactly the same components but with different weighting. Therefore they are strongly related and it is reasonable to expect that they are cointegrated (although this may not strictly be true).
Another example would be crude oil and RBOB gasoline futures. Since RBOB is a product of crude as a raw material, they are strongly linked from an economic standpoint.
On the other hand, we wouldn't expect a strong economic link between, say, gold and cotton seeds (although this doesn't mean that there is none). Even if they were cointegrated, one should be very cautious trading them as a pair.