We have discussed Basic Distance Approach in the previous blog post. In this post, we’ll look into one of the advanced methods in the Distance Approach and its differences to the Basic Distance Approach. If you haven’t read the previous blog post, we recommend reading it before you read this post.

So, what is the Pearson Correlation Approach? It is a type of Distance Approach and applies Pearson correlation on return level for identifying pairs. The main concept is similar to the Basic Distance Approach, where pairs are formed with a particular rule, and a portfolio is constructed based on the trading signals of pairs.