Pairs trading

Elliott, Robert J.; Hoek, John van der; Malcolm, W.P.

doi:10.1080/14697680500149370

Cited by 298 publications

(216 citation statements)

References 4 publications

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“…All of these share pairs produce cointegration error with AR(1) processes. Elliott (2005) and Herlemont (www.yats.com) also suggested AR(1) processes for modeling pairs trading, but they used the Ornstein-Uhlenbeck process which is the continuous-time counterpart of an AR(1) process to estimate the optimal boundaries. However, due to the complexity of stochastic analysis in the Ornstein-Uhlenbeck process, their results are difficult to be applied in practical situation.…”

Section: Mean First-passage Time Of An Ar(1) Process and Pairs Tradingmentioning

confidence: 99%

Finding the Optimal Pre-Set Boundaries for Pairs Trading Strategy Based on Cointegration Technique

Puspaningrum

Lin

Gulati

2010

Journal of Statistical Theory and Practice

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Pairs trading is one of the arbitrage strategies that can be used in trading stocks on the stock market. It incorporates the use of a standard statistical model to exploit the stocks that are out of equilibrium for short-term time. In determining which two stocks can be a pair, Banerjee et al. (1993) shows that the cointegration technique is more effective than correlation criterion for extracting profit potential in temporary pricing anomalies for share prices driven by common underlying factors. This paper explores the ways in which the pre-set boundaries chosen to open a trade can influence the minimum total profit over a specified trading horizon. The minimum total profit relates to the pre-set minimum profit per trade and the number of trades during the trading horizon. The higher the pre-set boundaries for opening trades, the higher the profit per trade but the lower the trade numbers. The opposite applies for lowering the boundary values. The number of trades over a specified trading horizon is determined jointly by the average trade duration and the average inter-trade interval. For any pre-set boundaries, both of these values are estimated by making an analogy to the mean first-passage time. The aims of this paper are to develop numerical algorithm to estimate the average trade duration, the average inter-trade interval, and the average number of trades and then use them to find the optimal pre-set boundaries that would maximize the minimum total profit for cointegration error following an AR(1) process.

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Section: Mean First-passage Time Of An Ar(1) Process and Pairs Tradingmentioning

confidence: 99%

Finding the Optimal Pre-Set Boundaries for Pairs Trading Strategy Based on Cointegration Technique

Puspaningrum

Lin

Gulati

2010

Journal of Statistical Theory and Practice

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“…The simplest special case of these strategies is perhaps pairs trading (see Elliott, van der Hoek, & Malcolm, 2005;Gatev, Goetzmann, & Rouwenhorst, 2006). In this case, two assets are initially chosen by the trader, usually based on an analysis of historical data or other financial considerations.…”

Section: A Concise Review Of Trading Strategiesmentioning

confidence: 99%

Flexible least squares for temporal data mining and statistical arbitrage

Montana

Triantafyllopoulos

Tsagaris

2009

Expert Systems with Applications

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A number of recent emerging applications call for studying data streams, potentially infinite flows of information updated in realtime. When multiple co-evolving data streams are observed, an important task is to determine how these streams depend on each other, accounting for dynamic dependence patterns without imposing any restrictive probabilistic law governing this dependence. In this paper we argue that flexible least squares (FLS), a penalized version of ordinary least squares that accommodates for time-varying regression coefficients, can be deployed successfully in this context. Our motivating application is statistical arbitrage, an investment strategy that exploits patterns detected in financial data streams. We demonstrate that FLS is algebraically equivalent to the well-known Kalman filter equations, and take advantage of this equivalence to gain a better understanding of FLS and suggest a more efficient algorithm. Promising experimental results obtained from a FLS-based algorithmic trading system for the S&P 500 Futures Index are reported.

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“…Vidyamurthy (2004) details an implementation strategy based on a cointegration-based framework, without empirical results. Elliott et al (2005) apply a Kalman filter to estimate a parametric model of the spread. These methods can be shown to be applicable for special cases of the underlying equilibrium relationship between two stocks.…”

Section: Literature Reviewmentioning

confidence: 99%

Adaptive pairs trading strategy performance in Turkish derivatives exchange with the companies listed on Istanbul stock exchange

Bolgün

Kurun²,

Guven³

2012

J Deriv Hedge Funds

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We implemented model-driven statistical arbitrage strategies in Turkish equities market. Trading signals are generated by optimized parameters of distance method. When the trade in signal is triggered by the model, market-neutral portfolio is created by long in the synthetic ETF, which is based on constrained least squares regression of selected Istanbul Stock Exchange stocks and short in Turkish Derivatives Exchange (Turkdex) index futures contract. We performed pairs trading strategy based on a comparative mean reversion of asset prices with daily data over the period February 2005 through July 2011 in Istanbul Stock Exchange (ISE) and Turkdex. We constructed a hypothetical ISE30 ETF Index on a daily basis in order to originate pairs trading strategy with Turkdex. Because of the leverage rule of (1-10) index futures contracts, we had to evaluate spot stock pairs formation with futures contracts pairs strategy. The results indicate that applied pairs strategy produced overall returns of 901 per cent during the

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Pairs trading

Cited by 298 publications

References 4 publications

Finding the Optimal Pre-Set Boundaries for Pairs Trading Strategy Based on Cointegration Technique

Finding the Optimal Pre-Set Boundaries for Pairs Trading Strategy Based on Cointegration Technique

Flexible least squares for temporal data mining and statistical arbitrage

Adaptive pairs trading strategy performance in Turkish derivatives exchange with the companies listed on Istanbul stock exchange

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