To compare the performance of two return series, we model each group's Sharpe ratio separately and compute the effect size as the difference between the volatility-adjusted returns. Visualizing the traces reveals granular performance insights into the distributions of each metric, as illustrated by the following chart:

In the last chapter, we introduced pairs trading as a popular algorithmic trading strategy that relies on the cointegration of two or more assets. Given such assets, we need to estimate the hedging ratio to decide on the relative magnitude of long and short positions. A basic approach uses linear regression.

The linear_regression notebook illustrates how Bayesian linear regression tracks changes in the relationship between two assets over time.