Pairs trading techniques: An empirical contrast

Blázquez, Mario Carrasco; Cruz, Carmen de la; Román, Camilo Prado

doi:10.1016/j.iedeen.2018.05.002

Cited by 16 publications

(10 citation statements)

References 10 publications

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“…Pairs trading in the futures market may engage an arbitrage between the futures contract and the cash position of a given asset (Adjemian et al , 2013). When the futures contract gets to the lead of the cash position, a trader may attempt to make a profit by holding a short position in the future market and going long in the spot market, expecting them to converge at some point (Carrasco Blázquez et al , 2018).…”

Section: Background the Studymentioning

confidence: 99%

“…Chiu and Wong (2012) with correlation technique; Gatev et al (1998) and Smith and Xu (2017) with distance technique; Jurek and Yang (2011) with stochastic technique; Do and Faff (2010) with stochastic differential technique and Vidyamurthy (2004) with cointegration technique have investigated this issue in different country contexts. Jurek and Yang (2011) and Carrasco Blázquez et al (2018) compared the results of different techniques for determining their strengths and weaknesses.…”

Section: Background the Studymentioning

confidence: 99%

“…In essence, the paper measures the potentials of “pairs trading” in four metal futures markets, namely, aluminium, copper, nickel and zinc in India. Moreover, cointegration is the most efficient method of structuring a pairs trading strategy (Carrasco Blázquez et al , 2018). The unravelling of the temporal relationship between future and spot market prices can explain the structure of Pairs trading (Vidyamurthy, 2004).…”

Section: Introductionmentioning

confidence: 99%

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Price discovery and pairs trading potentials: the case of metals markets

Nair

2021

JFEP

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Purpose This study aims to validate the “expectancy theory” of asset pricing and explores the price discovery process in metals futures markets. Design/methodology/approach This paper adopts the Johansen cointegration and vector error correction model approach to investigate the potentials of Pairs trading in the metals market during the period 2008–2019. Findings The results find the price movements in metal markets are not random walk and the current “futures” prices are the reasonable estimate of the “spot” metal prices in future. This study does not notice any significant differences in the price efficiency across metals markets, which signal the effects of limited idiosyncratic forces in price transmission. Practical implications The research suggests the covert use of metal futures to make gains from arbitrage trading. Originality/value The study emphasizes the potential of “pair trading” in commodity market context that is seldom discussed in academic papers.

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Section: Background the Studymentioning

confidence: 99%

Section: Background the Studymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Price discovery and pairs trading potentials: the case of metals markets

Nair

2021

JFEP

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“…More precisely, pairs trading consists of the simultaneous opening of long and short positions in two correlated assets with a balance point between them (Whistler, 2004). This type of strategy looks for profits from market inefficiencies irrespective of bullish and bearish market conditions (Blazquez et al, 2018). However, one notable feature in this regard is that prior researchers execute studies on pairs trading mainly in the context of stock market investments.…”

Section: Introductionmentioning

confidence: 99%

Pairs trading in cryptocurrency market: A long-short story

Nair

2021

Investment Management and Financial Innovations

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Pairs trading that is built on ’Relative-Value Arbitrage Rule’ is a popular short-term speculation strategy enabling traders to make profits from temporary mispricing of close substitutes. This paper aims at investigating the profit potentials of pairs trading in a new finance area – on cryptocurrencies market. The empirical design builds upon four well-known approaches to implement pairs trading, namely: correlation analysis, distance approach, stochastic return differential approach, and cointegration analysis, that use monthly closing prices of leading cryptocoins over the period January 1, 2018, – December 31, 2019. Additionally, the paper executes a simulation exercise that compares long-short strategy with long-only portfolio strategy in terms of payoffs and risks. The study finds an inverse relationship between the correlation coefficient and distance between different pairs of cryptocurrencies, which is a prerequisite to determine the potentially market-neutral profits through pairs trading. In addition, pairs trading simulations produce quite substantive evidence on the continuing profitability of pairs trading. In other words, long-short portfolio strategies, producing positive cumulative returns in most subsample periods, consistently outperform conservative long-only portfolio strategies in the cryptocurrency market. The profitability of pairs trading thus adds empirical challenge to the market efficiency of the cryptocurrency market. However, other aspects like spectral correlations and implied volatility might also be significant in determining the profit potentials of pairs trading.

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“…An exhaustive survey of pairs trading methods was recently developed by Krauss (2017). However, explicit comparisons between methods are scarce outside of the few most popular ones, and they do not seem to have a clear winner even when performed (Rad et al, 2015;Carrasco Blázquez et al, 2018).…”

Section: Introductionmentioning

confidence: 99%

Gold Standard Pairs Trading Rules: Are They Valid?

Fil¹

2020

Preprint

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Pairs trading is a strategy based on exploiting mean reversion in prices of securities. It has been shown to generate significant excess returns, but its profitability has dropped significantly in recent periods. We employ the most common distance and cointegration methods on US equities from 1990 to 2020 including the Covid-19 crisis. The strategy overall fails to outperform the market benchmark even with hyperparameter tuning, but it performs very strongly during bear markets. Furthermore, we demonstrate that market factors have a strong relationship with the optimal parametrization for the strategy, and adjustments are appropriate for modern market conditions.

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Pairs trading techniques: An empirical contrast

Cited by 16 publications

References 10 publications

Price discovery and pairs trading potentials: the case of metals markets

Price discovery and pairs trading potentials: the case of metals markets

Pairs trading in cryptocurrency market: A long-short story

Gold Standard Pairs Trading Rules: Are They Valid?

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