Hello Vincent,

about your questions:

1) number of shares comes from the dollar neutrality (the capital is split to halves, each for one leg and rounded down)...so if you have 2000 USD of capital:

NKE: 1000/32.46=30.8 ~ 30 shares

COH: 1000/38.32=26.09 ~ 26 shares

If you have margin account, you can take advantage of the 50% margin, so actually you would not divide it and you could have 2000/2000 allocation.

2) Do you use just linear regression?

Linear regression is used only in Residual model. In Ratio model it is not.

The Ration model is just based on calculating ratio of stock prices (P1/P2) and calculating some statistics on this series (moving average and standard deviation).

Actually the Ratio model is close to this:

http://luminouslogic.com/a-pairs-trading-example.htmAlso, do you use augumented Dickey Fuller test? How to know the half life and t-stat?

Nope, we don't use cointegration at all (at this moment), we use backtests for screening directly. We also look to correlation.

Because more and more people keep asking about model details, we will prepare detailed description of both models used and put it to the Wiki soon.