# Tagged Questions

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.

33 views

Lets say I have two stocks x and y and their corresponding stock price p(x) and p(y). consider HR as hedge ratio. Then we can calculate the spread using this equation. $spread=p(x)-HR*p(y)$ from ...
326 views

### What does the cointegration coefficient represent in pairs trading when cointegrating log stock prices?

In Pairs Trading by Vidyamurthy, on page 83 (and throughout the book), the author describes an elementary example of trading with log prices. The long run equilibrium of the basic portfolio is given ...
91 views

### What is the pseudo code for a pairs trading strategy?

I am trying to learn about pairs trading strategy. I know that we have to long and short cointegrated assests simultaneously. But I still have some confusion in how the strategy works. I wrote the ...
78 views

### cointegration strategy

If it can be proved that two time series $$S_t^1=\alpha + \beta S_t^2 + \xi_t$$ representing stocks are correlated, with $\beta=-2$ and then are proved to be cointegrated, how a portfolio should be ...
108 views

### How to trade the Ornstein-Uhlenbeck process?

My question comes from this paper, which is a short version of Avellaneda's paper The picture bellow provides a summary of the equations. Do I understand correctly that in order to trade OU process ...
175 views

### Pairs Trading Signals and Positioning

I am currently working on a research project for a pairs trading strategy and would like to know the correct positions to take when a signal has been triggered. Say we are using this equation to ...
107 views

Trying to evaluate model for pairs trading. Consider classic formula: $\frac{dP}{P} = adt+b\frac{dQ}{Q}+dX$, where $P$ and $Q$ are stock prices, and $X$ is a mean reverting process (MRP) and $a$ is ...
47 views

### Where can I get json currency data feeds every millisecond?

I have been looking for free or paid json data feeds on currencies for long. I have come across: currencylayer.com Oanda XE The problem is that I really need millisecond based updates. Can ...
878 views

What is the best way to begin calculations for pairs trading? I have seen two ways: 1) Start from the price ratio (StockAPrice/StockBPrice) and calculate mean, standard deviation and z-score from a ...
86 views

### Calculating PnL from log prices

I'm backtesting a statistical arbitrage strategy. To calculate the PnL I simply use $Y(t)-Y(t+n)$ for the profit on the first leg and $\beta*X(t) - \beta*X(t+n)$ for the profit on the second leg, ...
69 views

### how best to equalize individual pair risk in a portfolio of stock pairs?

I am building a portfolio of stock pairs in which each pair is individually hedged via beta/hedge ratio adjustment. I am looking for a method to ensure that I am taking the same risk in each pair that ...
113 views

### what are the criteria to select pairs?

I'm new to this forum, this is the first question I posted. I have many candidate pairs and I've used ADF test to make a first selection. There are more than 800 selected. The pairs are absolutely too ...
81 views

### What P&L netting should one use when a strategy has trades in two different geographic locations?

I am familiar with the FIFO methodology of netting buys and sells to obtain a realized P&L and outstanding position. Suppose there's a strategy which runs in two different places A, and B and ...
47 views

### optimal look back period for cointegration analysis on daily prices

I'm running some cointegration tests on 2 stock pairs and was wondering, generally speaking, what would be the optimal look back period to test considering I am using daily prices and the average ...
200 views

### Pair trading based on cointegration - equity line

I'm preparing a project at my Uni where I have to make a simple pair trading strategy using cointegration between two stocks. I'm stuck on the equity line calculation. I have prepared opening and ...
188 views

### How to projectP&L or drawdowns on pair trading , trading and portfolios? [closed]

This is for planning and risk management. I am stuck on the following thoughts - Back-test the trading strategy for a period similar to the one you expect and then project. Do the above using ...
259 views

### How to select optimal look back period for statistical arbitrage?

Is it possible to estimate the optimal look back period for OLS from which we test if residuals are stationary? Almost all papers that I read use random look back periods of 100 days, 252 days, 500 ...
418 views

### Cointegration Test: Residual is stationary but not random?

I am testing cointegration relationship on various pairs of stocks by this following these steps. Test for I(1) on a pair of stocks, says X and Y, using Dickey-Fuller test. If both time series are ...
251 views

### Mean reversion time estimation

I am new to mean reversion trading, and I would like to get some good references about how to estimate the time it takes to a mean reverting process to cross its long term mean.
377 views

### What is a canonical book or article to learn pair trading?

Can someone suggest a resource with a clean cut explanation of pair trading?
259 views

### References on Statistical Arbitrages

Is there any basic materials (books, papers) to read on Statistical Arbitrage? I certainly understand much of the useful information is in the industry. I just want to get some understanding on the ...
298 views

### The meaning of Ornstein-Uhlenbeck parameters

I am trying to understand theOrnstein-Uhlenbeck process $dX_t = \kappa(\theta-X_t)dt + \sigma dW_t$ my question is what is the meaning of the parameters? and assuming that we know those parameters ...
481 views

### How can I estimate the Ornstein-Uhlenbeck paramters of some mean reverting data that I have on R?

I have mean reverting data (Difference of 2 stock prices, that I want to do pairs trading on). I want to simulate my own mean reverting data as similar as possible to the real data that I have. The ...
610 views

### Dou you have an example of implementing Engle-Granger 2-step cointegration?

Does anyone know where to find an example of implementing Engle-Granger 2-step cointegration? Python's ideal, but any language will do. I've skimmed and read many articles, but understand little ...
4k 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 ...
125 views

### use synthetics for a pairs trading strategy

Let us say I want to pursue a pair trading strategy between stock A(long) and stock B(short). Can I replace this stocks with their synthetic option equivalents and have the same risk reward profile ...
67 views

For example, suppose we were trading a strategy which buys one Brent contract and sells one Gasoil contract. The minimum price fluctuation for a Brent contract is \$10, and the minimum price ... 1answer 292 views ### If I am very fast (less than 10 microseconds latency) what would be the first strategy to execute? [closed] Let's assume I found the holy grail of low-latency trading (which I didn't). For educational purposes, what would be the first strategy I would direct my trading code? 2answers 309 views ### Need help on cointegration I tried to test stock pairs for pairs trading. There are two questions I am not sure. I am not using ADF to test the log difference between two stocks. But I also see people using Johansen test. ... 1answer 781 views ### How does Volatility Pairs Trading work? I've read some material related to pairs trading for equities and I understand the process of finding non-stationary pairs price series that can be cointegrated to form a stationary series. The basic ... 3answers 1k 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. ... 2answers 241 views ### 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 ... 1answer 2k 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 ... 2answers 187 views ### 2 stocks, no shorting vs shorting. (concrete questions, mean-variance) I'd appreciate help with the following questions. Suppose there are two stocks$A$and$B$with expected returns$E_A, E_B >0$and volatilities$v_A, v_B >0$, respectively . Also, suppose ... 1answer 143 views ### Replicating the short part of a long-short trade using inverse ETFs I devised a pair trading strategy going long XXX and short B*YYY. B is the quantity of shares of YYY I need to short. The problem is I canâ€™t go short on YYY, but there is an inverse ETF for YYY ... 1answer 926 views ### 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 ... 1answer 435 views ### Ornstein versus AR(1) for modeling stationary data I've come across several posts regarding parameter estimation for O-U models given some stationary data (say, some sort of mean reverting spread), but I can't seem to find an answer as to why modeling ... 0answers 316 views ### 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. ... 1answer 1k 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 ... 0answers 308 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 ... 1answer 2k 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 adf.... 2answers 293 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 ... 3answers 1k 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 ...
990 views

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 ...
435 views

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 ...
542 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 ...
728 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 ...
2k 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 (L)...