The pair-trading tag has no wiki summary.
11
votes
4answers
3k views
Is statistical arbitrage on FX possible?
Do you know of any papers which consider pairs trading (or statistical arbitrage) on foreign exchange? I couldn't find any. I asked this question on several forums and got no reply. Thus I guess this ...
8
votes
3answers
1k views
How does pair trading work?
Explain pair trading to a layman. What is it, why would you want to do it, and what are the risks? Provide a real life example.
6
votes
2answers
1k views
How to build a mean reverting basket?
I have been playing with mean reverting pairs, but seems that most of the low hanging fruit (ie pairs) have been squeezed already. I would like to start with mean reverting baskets (>2 securities) in ...
6
votes
1answer
939 views
How does Kalman filtering of beta in pairs trading model work in R?
Could anyone show how this could be done in R? The dlm package seems to be a good start, but I can't really find any good examples to learn from.
Currently I have ...
6
votes
1answer
329 views
What different methods of pairs selection exists? (For Pairs trading)
(I'm quite new to quant finance so I'm not sure if this is an eligible question.)
I've decided I want to backtest pairs trading on the Nordic stockmarket. So I would guess there exists different ...
4
votes
3answers
273 views
Calculating the right portfolio(position size for each leg) in a Long/Short Strategy
For a Long/Short Strategy, I have two stocks with different volatilities. How can I calculate the right position size for each leg?
*The pair trading is not coming from co-integration but more as a ...
4
votes
1answer
306 views
Should cointegration be tested using close or adjusted close prices?
When doing cointegration tests should I use the adjusted close price or just close price for the time series?
The dividend of each stock is on different dates and can cause jumps in the data.
4
votes
2answers
462 views
How should I compute the Sharpe Ratio for mid-frequency pair trading strategy?
I have a pair trading strategy with positions that last 3-5 days and trades 2-3 times a month. By design, all the trades are profitable until the cointegration is broken.
Should I calculate the ...
4
votes
2answers
408 views
Cointegration trading: Ignoring pairs that aren't economically related
Cointegration trading question
What's the state of the art when it comes to choosing proper subsets of stocks/assets where cointegrating relationships aren't ignored as (likely to be) spurious?
For ...
3
votes
2answers
494 views
Searching for pairs-trading in sub O(n^2 t) time
Let there be $n$ stock symbols.
Let each stock symbol have exactly $t$ ticks (with all ticks miraculously aligned.)
We are now searching for potential pairs for pair trading.
A brute-force solution ...
3
votes
1answer
177 views
What is the proper way to calculate returns for Pair Trading?
Edit
I am assuming that I don't need to use margin account to short here:
What is a standard way to calculate return for pairs trading strategy? For example, I bought 100 dollars worth of a loser ...
3
votes
1answer
152 views
Pairs trade CDS contracts using cointegration
Recently I have looked at some sovereign CDS spreads (of the Nordic countries to be precise) and have tested for cointegration in the levels (i.e. untransformed) and logs of the spreads. Tests ...
3
votes
2answers
228 views
Statistical significance of a pair trading strategy
How can I test the significance of a pair trading strategy, i.e. that the H0 is "The strategy has no predicting power".
I was considering to use the technique in Evidence Based Technical Analysis ...
3
votes
2answers
760 views
Pair Trading Index Options
Suppose the trade is between Index Options of two Indices X and Y which are quite similar (but not exactly).
So for the equivalent strikes, one can quote option on Index X and cover in Index Y.
But ...
2
votes
1answer
220 views
Multiple (linear) regression
I am looking for some inputs on a pair trading strategy that I am trying to improve with some semi-fundamental input.
The basic idea is to use multiple linear regression to estimate the price of a ...
2
votes
1answer
675 views
How to build an execution trading system with CQG API?
I am currently using CQG for spread trading and have a spread trading strategy in CQG chart. I am trying to automate my spread trading strategy in CQG, but CQG told me to look at CQG API samples to ...
1
vote
1answer
207 views
Performance Stats of Pairs Trades
This is something I've been thinking about for a while but I can't reach a clear conclusion. When we calculate, for example, the profit factor for a pairs trading strategy, do we treat each pairs ...
1
vote
0answers
158 views
How would I calculate a stop on a pair trade? [closed]
I have a trading strategy that I use on single tickers. I'd like to start using it with pairs as well. However, I'm somewhat math challenged and not sure how to best calculate the stops of the ...
0
votes
1answer
204 views
main arbitrage & statistical arbitrage concepts
can we please summarise here some of the basic concepts, tools used in arbitrage and statistical arbitrage in real life?
ARB: benefit from price difference on same asset
ARB: difference between ...
0
votes
0answers
122 views
Mean Reverting Spread
I have constructed a mean reverting spread using two indexes. I know they have to be mean reverting, but when plotted side by side they are mean reverting for a little bit and then deviate and head ...
0
votes
2answers
245 views
Pairs trading: Question on non-negative profits, size of the positions and trading signals
I'm trying to backtest Pairs Trading but have become a bit confused on the different methods of selecting pairs, how to look for trading signals and what size of the positions to take in the assets.
...
0
votes
0answers
152 views
Lagging Beta Strategy
Came across a method involving pairs in the book Hedge Fund Market Wizard:
Given a Stock(or Collective of instruments)that follows closely to say Dow index with a beta<1(very short term) but ...
-4
votes
1answer
370 views
How to calculate the weight of the stocks using the linear regression?
I do a simple example with the follow three series(stocks prices):
...
