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FinanceCointegration (Pairs Trading)
By Sitraka Forler · Lecturer, Durham Business SchoolUpdated 13 September 2026 About this site
Two non-stationary prices whose linear combo is stationary.
Two stocks can each wander randomly yet move together long-term - their spread is mean-reverting. Pairs trading shorts the rich leg and buys the cheap leg, betting the spread closes. Tested with the Engle–Granger or Johansen procedure.
Formula / theory
Engle–Granger: regress A on B, test residuals for stationarity (ADF)
In Python
from statsmodels.tsa.stattools import coint score, pvalue, _ = coint(asset_a, asset_b) # pvalue < 0.05 ⇒ cointegrated, tradeable pair