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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### Trading pair of cointegrated stocks using options

Suppose stock A and B are cointegrated and a trading signal is dervied from it. Instead of long the underperforming and short the over-performing stock, what about long at the money call and put ...
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I have an automated strategy that has been running "ok" for month and generates consistent profit on Perpetual swaps (cryptos). However something annoys me: I calculate the spread based on ...
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### Kalman Filter Implementation using PyKalman

I am trying to apply a simple Kalman filter to pair trading. My underlying stock pair is cointegrated with no constant term. Can someone kindly advise if i am going on the right track with the Kalman ...
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50 views

### Do i do a long/long or short/short of the trading pair when they have a negative cointegration coefficient?

A pair of stock that I have been trading has a negative cointegration coefficient (Beta) that is statistically significant. When i want to long a spread, according to the spread equation below, I ...
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### How to interpret the physical meaning of cointegration vectors of log prices in real world

I'm trying to understand the physical meaning of cointegration vectors of log prices in the real world. For example, if I have two assets $A$ and $B$, and Johansen test gives us a cointegration ...
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### zero-crossing variant of pairs trading

The concept of zero-crossing was suggested in Does Simple Pairs Trading Still Work?, July 2010, Financial Analysts Journal 66(4) by Binh Huu Do and Robert Faff link to paper The idea is to select ...
1 vote
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### Linear Regression Cointegration Strategy

When doing linear regression to figure out the hedge ratio for the cointegration relationship what does it mean if the residuals are stationary but end up looking like the price time series of y? How ...
180 views

### What is the margin requirement for a dollar neutral long short portfolio

I have been working on a market neutral pairs trading strategy. See https://medium.com/@nderground-net/backtesting-a-pairs-trading-strategy-b80919bff497 I am trying to understand whether I am properly ...
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1 vote
104 views

### Johansen Cointegration Test returns non-stationary error even though trace statistics suggest their existence

I'm working with Python and use the statsmodels.tsa.vector_ar.vecm.coint_johansen function to analyze if several stocks have a stationary error term with respect to ...
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92 views

For a pairs trade, when calculating the zscore should I include the gradient (slope) from OLS in the calculation: ...
86 views

For a pairs trade, when calculating the zscore should I include the intercept point in the calculation: ...
556 views

### Role of Intercept In OLS Beta Estimation

I am constructing a classic pairs trading strategy in which I use a linear estimator to model the spread of two assets opening a long-short market neutral position during times of divergence. I am ...
1 vote
335 views

### In pair trading, we should look into the spread of price or return?

All I noticed that in the pair trading, some measure the spread on pricing and some measure the spread on return. Both methods make sense, it is intuitve to model price, but convergence of return ...
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349 views

### Why aren't the optimal entry/exit thresholds for OU pairs trading relatively invariant to shifts in the OU mean?

The optimal entry/exit thresholds for mean reversion trading (assuming an underlying Ornstein-Uhlenbeck (OU) process) is derived in the paper "Optimal Mean Reversion Trading with Transaction ...
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### Help with reading currency pairs

Please excuse me in advance, as I suspect my question is slightly off compared to the other questions on this website, but I am currently taking a class in International Finance and I have a few ...
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562 views

### Should we include constant in linear regression in pairs trading?

Should we include constant in linear regression while calculating hedge ratio for pairs trading strategy?
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### How to correctly explain the current price action in a trading chart with the Hurst Exponent found?

I watched this video tutorial to learn how to estimate the Hurst Exponent using an Excel spreadsheet and a time series sample of 1025 data. I decided to use futures 1H markPriceKlines data from ...
1 vote
389 views

### What would be the problem with this pairs trading allocation scheme?

I am new to pairs trading, and I have come up with an idea of how to allocate capital between the long and short leg of a pairs trade. I feel that there is a problem with it, and I want to figure out ...
1 vote
161 views

1 vote
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### How To Construct A Volatility Spread Position?

Is there a simple way to spread the volatility of one product against another? By simple I mean one trade executed on each leg rather than constant delta hedging. I can see a lot of opportunity for ...
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### Fx futures pairs

I want to setup a pairs trade with the Japanese yen as the quote currency and Mexican peso as the basis currency. (long MXP vs JPY) 2 /M6J contracts, notional is 1,250,000 JPY = 10966.5*2 = 21933 USD ...
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### Research papers and other resources to learn about useful statistical tools for pairs trading

Brief background: I recently started writing a Python code to find stocks which might be cointegrated. I iterated over a really long list of stocks trying to find a pair which might be cointegrated. ...
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### Variance of trade length for the OU-process

Based on the article by Bertram (2010), I am trying to calculate the variance of the trade length stated in equation [10] of the paper. However, the weights used has a specification that I cannot ...
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215 views

### What do I need the Error correction model for in the two step Engle Granger approach (bivariate Cointegration)

could someone kindly explain what I need the ECM for in a bivariate Cointegration test? I am currently trying to reproduce the results of Rad et al. (2015): "The profitability of pairs trading ...
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### What is the reason for using log prices in Pairs Trading (Cointegration)?

I was wondering, why some of the research papers on pairs trading (using the cointegration approach) are using log prices to determine the spread of a pair? Why are they not simply using regular ...
832 views

I've been trying to wrap my head around cointegration. Currently I use the log returns of both stocks A and B, calculate the spread given by: $S = log(A) - n*log(B)$ where $n$ is the Hedge Ratio ...
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### Cointegration and hedge ratio

I've recently been looking into pairs trading through cointegration. So far I've used the log returns of stock A and stock B in a rolling OLS to find the hedge ratio. However, I've noticed that for a ...
1 vote
84 views

### Number of observations required for cointegration test

Hopefully a very simple one. I've got two assets daily close prices. How many observations should I use to test for cointegration between these two assets ? Any pointers wuold be great. A
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1 vote
719 views

### How to compute returns of a Pairs Trading Strategy with different holding periods?

I am currently working on a project where I am testing a Pairs Trading Strategy based on Cointegration. In this strategy I am considering to trade a couple of hundred stock pairs every day over a time ...