Questions tagged [pairs-trading]
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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42 views
Need help with Pairs Trading Performance Calculation
I currently write my master thesis about pairs trading. I am now stuck at calculating the performance of my pairs correctly:
In my first column, I have got the current position in the market (0=...
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40 views
Managing a portfolio of pair trades
When arbitraging ETF holdings against the ETF, how does one manage the portfolio over time? Assume the strategy creates a long signal in pair A (stock X/ ETF) and a short signal in pair B ( stock Y / ...
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1answer
62 views
Pairs Trading: Normalized price series (co-integrated and correlated) always end up diverging
Need some expert advice and suggestions:
I am trying out pairs trading or statistical arbitrage (as traders say). But even if two price series are co-integrated (ADF test, Hurst exponent, Ornstein–...
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1answer
95 views
Why is OLS based spread not reflective of actual difference?
I'm trying to define and track the spread between two time series (data available here), for the purpose of learning pair trading basics.
When running a cointegration test the two series seem to be ...
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49 views
Constructing a Beta Neutral Hedge in a Pairs Strategy
Looking for resources / explanation.
Creating a dollar neutral hedge is easy - stockprice-a/stockprice-b
How do I create a beta neutral hedge?
I find discussions but no explicit derivation ...
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1answer
60 views
Correct calculation of returns from a pairs trade
I am trying to understand how pairs trading works but I am confused about how to go about calculating the return on the pairs trade when I reverse my positions. I have been reading 'Pairs Trading - ...
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1answer
38 views
What value to put in lm() function when testing for cointegration (R)
I'm a CS student working on a financial computing project + have a question regarding cointegration testing using linear regression with the lm() function.
https://www.rdocumentation.org/packages/...
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34 views
Sizing a beta neutral Pairs trading with an allocation limit
Hopefully a simple one for someone.
I've a pair of stocks A and B. The beta adjusted spreads tell me I need to be selling A and buying B, my beta for B is 1.5, so in order to get a beta neutral pair ...
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1answer
125 views
Generating buy/sell signals in pairs trading
I'm reading a quantitative trading book"Quantitative Trading with R" by Harry Georgakopoulos.
In the pairs trading section, there's an example that creates the spread and generate buy/sell ...
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1answer
84 views
pairs trading algorithm with returns
I'm having a difficulty grasping how to write a pair algorithm using returns instead of prices.
With price differences, I have the mean difference over a long time period. When the current price ...
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0answers
49 views
Pair Trade - Should stock order matter
I am testing a simple pair trading algorithm and I'm having problems if I swap the stocks around. I don't know which stock should be X and which should be Y. When I swap them I get very different ...
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0answers
29 views
How can I normalize price data for 2 financial instruments from different categories?
Lets say I want to build a divergence / convergence strategy with FOREX currency pair and a correlated commodity. How can I normalize the prices so that I get an accurate idea of the movements of each,...
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272 views
Calculating % Return in Pairs Trading Strategy
Hi guys Could you help me here?
I would like to calculate the return of a Pairs Trading strategy. For example:
18/11 - Open the Trade: I will go long on A and Short on B:
Stock A : $ 32.24
Stock B ...
2
votes
1answer
151 views
Pairs Trading parameters
I am looking to optimize the open/close signals and time for a pairs trading strategy my partner and I are researching. We don't want to go p-hacking so we have been trying to decide:
We have 20+ ...
4
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1answer
59 views
Negatively Correlated Assets with similar medium-term trends
Theoretically, one could have stock prices with returns $\rho_1(k)$ and $\rho_2(k)$ having mean values $\mu_1$ and $\mu_2$, but still be negatively correlated with
$$
\mathbb{E}[(\rho_1(k)-\mu_1)(\...
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1answer
133 views
Pairs Trading situation Spread changes
I'm setting up and following a pair trading operation by the method of summing the distances squared (SSD). After determining the best pairs, I have to track the spread between the normalized prices.
...
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1answer
143 views
Bootstrap Method for Assessing Pairs Trading Performance
After reading this paper I tried to replicate it. I almost done, but I am stuck on the section 3.6 where the author constructs a random pair (how he constructs this?) for Assessing Pairs Trading ...
3
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3answers
335 views
Pair trading - short / long the spread
I am wading into pair trading concepts. Here is one article I've read.
I understand for these strategies our intention is to go long on one asset and short another, however I do not understand what ...
2
votes
1answer
118 views
generalisation of cointegrated stock pair strategies to multiple cointegration
Question: as it is well known, there are strategies to trade pairs of stocks which are known to be co-integrated. See for instance here:
https://medium.com/auquan/pairs-trading-data-science-...
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72 views
Pair trading: Hege ratio by price ratio or by regression on the stocks
So I feel things like this question do exist on the site however I failed to form a conclusion based on what was written, so I decided to formulate my query as exactly as possible and hopefully anyone ...
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0answers
125 views
Pairs trading strategy: Portfolio returns and NAV
Currently trying a pairs trading approach using cointegration. Tried both formations:
$$log(P_t^A)=log(P_t^B) \hat{\gamma}+\hat{\mu}+\epsilon_t \hspace{0.5cm} (1)$$
$$P_t^A=P_t^B \hat{\gamma}+\hat{\...
0
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1answer
59 views
Short sale and zero investmest strategy
Suppose I want to build a pairs trading strategy. Theory says that we can create a zero-investment portfolio by going long stock A and short-selling stock B, given a certain hedge ratio. My question ...
5
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2answers
752 views
Cointegration and Ratio Pair Trading
I'm having some confusion doing Engle-Granger Cointegration test and then trade the ratio.
Methodology:
Run an OLS fit for A and B price time series without a constant. Therefore,
$\hat{Y} = \gamma \...
3
votes
3answers
446 views
Calculating Sharpe Ratio with dynamic position sizing
I'm currently backtesting a mean reversion pairs trading strategy. However, instead of simple long or short trading signals, I'm using multiple "levels", where the further away the spread is from the ...
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0answers
220 views
Pair trading strategies in fixed income
We usually hear about finding cointegrated pairs of stocks in pair trading, but it seems it is not as developed in fixed income despite the fact that the spectrum of securities is large (different ...
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1answer
7k views
How to calculate Sharpe Ratio from $ returns?
I have a pairs strategy that I am trying to calculate the sharpe ratio for. Currently I am using python for my analysis and calculation. I have a dataframe that contains the cumulative returns in $'s ...
2
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3answers
482 views
If two price series are cointegrated but not correlated, how do I find the hedge ratio?
Mathematically, what is going on here?
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2answers
148 views
When constructing a cointegrating series, does choosing the linear regression with the lowest ADF test statistic yield the optimal hedging ratio?
Multiple sources say that you should find the optimal hedging ratio between two stocks in a pairs trade by conducting 2 linear regressions (with each stock as the independent variable), and using ...
0
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2answers
578 views
Standard deviation of a long-short portfolio with net position zero
I've come across the following question and I'm slightly stuck in answering it:
Suppose you have a two-stock portfolio that is long one stock of asset
A, and short one stock of asset B, with A ...
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2answers
777 views
Cointegration vs combination of returns
Hi Quantitative Finance,
I understand that there are a wealth of pairs trading models out there. Recently, it got me thinking as to why we go through the trouble to find cointegrated pairs while we ...
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votes
3answers
834 views
Why isn't it appropriate to use correlation between prices in a pairs trade strategy?
I've already seen this question and read through all the answers, but I'm still confused about why you shouldn't use price correlation in a pairs trade strategy.
For example, if I'm looking at the ...
2
votes
1answer
184 views
Is this the correct way to hedge two securities against each other?
Let's say I believe that $ts_1$ and $ts_2$ move together and I would like to pairs trade them. Am I correct in understanding that to hedge them against each other I would get their $Var_1$, $Var_2$, ...
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1answer
1k views
How to “Standard Beta Hedge”?
Let's say I have 2 time-series, how would I "standard beta hedge" them against each other? For example, what if the position in 1 timeseries is 100 shares at 16 USD per share. Another time-series is ...
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0answers
289 views
Cointegration and pairs trading
I have intuition that cointegration between elements of pair of equities somehow contradicts pairs trading strategies. Because the better is linear fit of the model the less opportunities we have for ...
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1answer
5k views
Calculating the returns of a long/short strategy
I feel like an idiot asking this but i haven't found the answer anywhere.
I have backtestest a paris trading strategy, while calculating the returns of the strategy I run into some problems when the ...
2
votes
0answers
174 views
Relative Value Trading of American Style Options on Futures, Calcuating hedging ratios?
I am interested in Relative Value Trading of American style options on futures and have not found a whole lot of literature on it. The best resource I have discovered so far is a few pages in Colin ...
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2answers
260 views
pair trading - rolling adf test
I am testing a pair trading strategy. Every day I recalculate the hedge ratio using the past N prices of the 2 underlying. With the hedge ratio, I calculate the past N spreads and do an ADF test to ...
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1answer
814 views
calculating the pair weights from log price hedge ratio
I am calculating the hedge ratio using log prices:
$$
\ln(A) = \text{hedge_ratio} \cdot \ln(B)
$$
How do I convert the hedge_ratio into a number of shares of A vs....
3
votes
1answer
254 views
How do you decide what time frame you're going to use when testing for cointegration?
I've been fiddling around with different time frames when doing tests for cointegration between two timeseries, and I've realized that the dates that you use for your start/stop of the test will ...
0
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1answer
346 views
How can I apply error correction model in pairs trading?
I have read Vidyamurthy and others, but did not find clear example of error correction model (ECM) application in pairs trading.
How should I use the ECM model in the pairs trading?
How to use ECM ...
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2answers
3k views
Close or Adjusted Prices when Backtesting
I've been doing this for some years now, but recently, since I started fiddling around with an old pairs trading strat of mine again, when updating the databases before running the tests, I was ...
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1answer
715 views
pair trading cointegration - calculating shares quantities traded, portfolio value and returns
I have a trading strategy based on the cointegration of X and Y where beta derived from the regression is 0.7. My initial capital to invest is 1000.
My understanding that the quantities of X and Y to ...
1
vote
1answer
407 views
What causes poor returns in pair trading of very cointegrated securities?
I've been running some backtests of a pair trading strategy on 1 year worth of 5 min bars of two securities and I've noticed pretty poor returns, especially once transaction costs are taken into ...
0
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1answer
334 views
How buying/selling pairs and entering/exiting trade works in pairs trading?
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 ...
5
votes
1answer
2k 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 ...
2
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0answers
389 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 ...
4
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0answers
2k 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 ...
2
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1answer
634 views
Mean reversion and adjusted beta for pairs trading
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 ...
2
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4answers
237 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 someone ...
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2answers
995 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 ...
