Equity Pairs Trading Under Regime-Switching Cointegration

We apply a Markov regime-switching cointegration framework to equity pairs trading, allowing the long-run equilibrium relationship and hedge ratio to vary across latent market regimes. The model is estimated using an expectation-maximisation algorithm, and regime persistence is assessed using filtered regime probabilities. Entry and exit signals are derived from the regime-conditional spread distribution, with risk management adapted to the prevailing regime state.