Pair Trading Lab > Questions & Answers

Question about half life

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steven fastuca:
I the analysis portion of the lab, it has a number for half life.

does this number mean the max number of days we should hold a pair trade?

how can this figure be useful when creating a strategy?

admin:
Half-life indicates the expected time to revert half of the spread deviation from the mean. You could use half-life directly to estimate max holding period of the pair trade. Often it is also related to optimal model parameters.

Take this example:
https://www.pairtradinglab.com/analyses/VNvZcyU6jVbST1uc

The half-life is indicated to be around 38 and from profit analysis you can see strategies having periods in the range 35-40 are situated among the best performers.

In any case, the lower the half-life, the better.

admin:
Of course half-life must be still >= 0. If the half-life is negative, it means the time series is not mean reverting at all.

So you look for the half-live as low as possible, but still positive.

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