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.
2
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3answers
73 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 ...
0
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0answers
49 views
Pair trading cointegration
When looking for cointegrated pairs, you assume that times series are integrated of order one and try to find a linear relationship using a regression that makes them integrated of order 0 (I(0)). Now ...
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0answers
67 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 ...
2
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1answer
582 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 ...
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0answers
86 views
Price Series vs Returns series for pairs trading
Consider two stocks A and B. Suppose we regress their price series and find a coefficient β. Specifically,
Pi = βQi + Ei
And we find that the Error is mean reverting. So the strategy ...
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0answers
42 views
What is the value for Δt term in an Ornstein Uhlenbeck process?
I am looking at O-U processes for the first time and I was wondering what is the Δt term value.
To become more specific I have a daily dataset with daily prices ...
0
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0answers
54 views
looking for mathematical technique to predict reversion or trend at the end of a cycle
I have a pairs trading algorithm, and at the end of the cycle, the pair is either going to revert or diverge to/from the trend line. When the cycle is smooth, it reverts, when there is some ...
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1answer
180 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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0answers
33 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 ...
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0answers
38 views
Cointegration code for Ruby?
Does anyone know if there is a dickey Fuller or other co integration library for Ruby?? This is a simple question but stack overflow requires more filler to post.
0
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2answers
111 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 ...
1
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2answers
193 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 ...
6
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3answers
430 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 ...
3
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1answer
157 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 $Var_1$, $Var_2$, ...
1
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1answer
575 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
218 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 ...
1
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1answer
2k 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
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0answers
120 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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0answers
115 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 ...
1
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1answer
463 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
197 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
190 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 ...
0
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2answers
2k 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
473 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
276 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
137 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 ...
4
votes
1answer
1k 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
315 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 ...
5
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0answers
832 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
votes
1answer
405 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 ...
1
vote
4answers
118 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 ...
1
vote
2answers
612 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 ...
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0answers
218 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, ...
2
votes
1answer
133 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 ...
8
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2answers
1k 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 ...
2
votes
1answer
330 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 ...
0
votes
1answer
222 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 ...
3
votes
2answers
878 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 ...
5
votes
1answer
590 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.
4
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3answers
550 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 ...
3
votes
1answer
947 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 ...
4
votes
2answers
4k 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 ...
2
votes
3answers
1k 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 ...
3
votes
1answer
3k views
Calculate spread for pairs trading
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, ...
1
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0answers
869 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 ...
1
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1answer
223 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 ...
2
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2answers
757 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?
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0answers
76 views
Is it important to equalize the minimum price fluctuation in pairs trading?
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 ...
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1answer
364 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?
2
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1answer
1k 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 ...
