zero-crossing variant of pairs trading

External question — Quantitative Finance Stack Exchange Author: user25285511 Original post: https://quant.stackexchange.com/questions/80121 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. The concept of zero-crossing was suggested in Does Simple Pairs Trading Still Work? , July 2010, Financial Analysts Journal 66(4) by Binh Huu Do and Robert Faff link to paper The idea is to select pairs with the highest number of zero-crossings during the formation period. What I don't understand from the paper and what confuses me is whether when they define zero-crossing they mean each case when the pair spread crosses 0 or the spread first go to, say, 2 (-2) std and then falls (rises) to 0. When you count all zero-crossings, there may be many cases when the spread goes to -0.07 and then cross 0 from below. But this is not a significant move. Any idea how this is done in practice?

External answer — Quantitative Finance Stack Exchange Author: Sane Original post: https://quant.stackexchange.com/a/80205 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. In the context of the paper " Does Simple Pairs Trading Still Work? " by Binh Huu Do and Robert Faff, zero-crossing refers to instances when the spread between the two assets crosses the zero line. A zero-crossing occurs whenever the spread changes sign. This means if the spread was positive and then becomes negative, or if it was negative and then becomes positive, that counts as one zero-crossing. In actuality, Zero-Crossing is borrowed from mathematics. The paper suggests selecting pairs with a high number of zero-crossings, implying that these pairs exhibit frequent reversals or fluctuations around the zero line. This is considered valuable because it indicates that the pairs are frequently reverting to their mean spread, which is a desirable property for pairs trading strategies. The frequent zero-crossings suggest that the pairs are actively moving within a range that makes them suitable for mean-reversion strategies. Given this, zero-crossing measure does not capture magnitude of movements, though the latter might be important to capture.