Financial Analysis - Build a ChatGPT Pairs Trading Bot - Fixing the Spread

The video tutorial discusses the concept of mean reversion in trading, highlighting the importance of ensuring that spread signals are stationary and mean-reverting. It emphasizes the need to normalize asset prices before calculating spreads to avoid skewed results. The tutorial compares different methods of spread calculation and evaluates their effectiveness in generating trading signals. It concludes by acknowledging the need for further improvements in the approach.

What is the primary characteristic of a mean-reverting spread?

• It remains constant at a high value.

• It consistently increases over time.

• It decreases steadily over time.

• It oscillates around a mean value.

Why is it incorrect to subtract raw asset prices when calculating the spread?

• It makes the spread calculation too complex.

• It causes the spread to be dominated by the larger asset's scale.

• It leads to a spread that is always zero.

• It results in a spread that is too volatile.

What is the correct method for calculating the spread between two assets?

• Subtract the raw prices of the two assets.

• Add the raw prices of the two assets.

• Normalize the asset prices first, then subtract.

• Multiply the raw prices of the two assets.

What was the observed return of the incorrect spread calculation?

• 25%

• 5%

• 50%

• 10%

What is the main issue with the corrected spread calculation as discussed in the final section?

• It is not mean-reverting.

• It does not outperform a buy-and-hold strategy.

• It results in negative returns.

• It is too complex to implement.