New edge proposed: engle_granger_cointegration_residual_reversion — E8 Intelligence Research

{ "name": "engle_granger_cointegration_residual_reversion", "source": "Engle & Granger (1987) cointegration; statistical arbitrage literature (Vidyamurthy, 'Pairs Trading')", "type": "entry_engine", "rule": "On the rolling last 500 bars compute the hedge ratio beta via OLS of log(XAUUSD close) on log(DXY-proxy or EURUSD close); enter long the spread when the standardized residual z=(spread-mean)/std < -2 and exit when z reverts to 0, with z window of 100 bars and no overlapping positions.", "pseudocode": "for t in bars[500:]:\n y = log(close_A[t-500:t]); x = log(close_B[t-500:t])\n beta = OLS_slope(y, x); mu = mean(y - beta*x); sd = std(y - beta*x)\n z = ((y[-1] - beta*x[-1]) - mu) / sd\n if z < -2 and flat: long_A_short_B_beta\n if z >= 0 and long: close", "why_it_works": "Two economically linked instruments share a long-run equilibrium, so transient residual dislocations statistically tend to mean-revert." } Author: Andrew Stewart Caldin, Independent Researcher, UK. Part of the E8 Intelligence Research series. Platform: e8intelligence.com