Pair Trade: Masco vs Mohawk Industries

Masco and Mohawk Industries have the same credit worthiness, as illustrated by their CDS graphs:



Their stocks are highly correlated, too: the R-squared of the regression is 92%. However, Masco's stock is far (several standard deviations) from the value implied by linear regression, which would be around $11.



In this pair trade, since the slope of the regression line is 0.263, we would be long 0.263 shares of Mohawk for each share of Masco shorted.