Cointegration Pairs Trading Interview Guide
Cointegration pairs trading interview guide covering cointegration intuition, hedge ratios, residuals, stationarity, testing, and caveats.
Candidates explaining spread stability, hedge ratios, and stationarity.
Cointegration looks for stable combinations
Two non-stationary series can be cointegrated if a weighted combination is more stable than either series alone over time.
The residual becomes the object of interest
In a pairs context, the residual spread is tested for stationarity and potential mean reversion after choosing a hedge ratio.
Concrete example
Two share classes of related companies may drift individually while their price spread stays bounded over certain periods.
Tests are not trading rules
A cointegration result needs out-of-sample validation, cost assumptions, liquidity checks, and monitoring for relationship breakdown.
Common mistakes
Candidates often treat a test statistic as proof of alpha. Cointegration is relationship evidence, not guaranteed convergence.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.