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Pair trading. Suppose the current price ratio of pair of stocks in the energy sector (P A1 /P B1 ) is 3 which is below
Pair trading.
Suppose the current price ratio of pair of stocks in the energy sector (PA1/PB1) is 3 which is below its normal level of 5.
Can you make a profit in the event of price convergence at time 2 by shorting an arbitrary number X of shares of stock B for each share of stock A longed? If so, please prove it. If not, what would be the required range of X that would result in a profit in the event of price covergence at time 2?
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