Pairs trading is a market-neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy.

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Avoiding negative spread in pairs trading

I'm constructing money-neutral spread by this formula: Spread = log(P1) - log(P2), where P1 and P2 is prices of two instruments But sometimes spread can get into ...
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Detrending before cointegration

When checking for co-integration , is it necessary to detrend the time series? What is the best way to go about it?
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Position Sizing For Ratio Pairs Trade

Ok, let's say I'm trading a spread of two stocks, X & Y, The spread is calculated as a ratio (Spread = X / Y). I use rolling stats to calculate the mean, standard deviation and hence the z-score ...
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pairs trading detrend the spread

I have calculated a hedge ratio that generates a mean reverting spread (stationary, without trends) 60-70% of the time. But the remaining 30% of the time, it seems like there is a trend in the spread. ...
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180 views

pairs trading or long short strategy given volatility of the stocks

Suppose I have 2 stocks and the only thing I know about them is their volatility and that they cointegrate. Let's say vol of stock A is 25% and B is 20%. Will I be able to find a hedge ratio only ...
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548 views

ADF test in R yielding perfect cointegration. How is this possible?

I am using the famous conintegrated pairs tutorial to just different stocks for cointegration. The adf.test yeilds perfect cointegration, which I feel must be incorrect. Here is why: When I run ...
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170 views

Stat Arb Equity Pair Position Trigger

I am new to pairs trading and am in the process of constructing the code for backtesting a basic pair trading strategy. While I understand the basic idea behind the pair trading strategy, I am having ...
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281 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 ...
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1answer
354 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 ...
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427 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 ...
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569 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 ...
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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. ...
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847 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 ...
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1answer
535 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 ...
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2answers
432 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 ...
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1answer
320 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 ...
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665 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 ...
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3answers
410 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 ...
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3answers
695 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 ...
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894 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 ...
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727 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 ...
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525 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): ...
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2k 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 ...
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1answer
1k 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 ...
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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 ...
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1k 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 ...
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1answer
376 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.
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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 ...
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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.