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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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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Pair Trading - Spread noise from Log returns regression
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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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 ...
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Pairs trading with 3+ assets
I am trying to understand how you would construct a pairs trading strategy on 3+ assets.
In the 2 asset case, assuming zero drift, we trade based on:
$$dX_t = \beta_AdS_t^A - \beta_B dS_t^B,$$
where $\...
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Pair trading with strong positive correlation in asset return and cointegration
I am a newbie exploring pairs trading. The main idea is to short-sell the relatively overvalued stocks and buy the relatively undervalued stocks based on the mean-reverting properties of the spread ...
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Is my spread calculation correct?
I have automated Pair trading strategies running on both CME Futures and cryptocurrency perpetual pairs. I can chose between different spread calculation type and I noticed that the one I thought was ...
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Generalization of pairs trading to portfolios?
Standard pairs trading only trades one security against another.
In principle, nothing is stopping one from trading a portfolio of N stocks. There must be work on this? If so, can you point me to any ...
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Simple Beta Neutral Intuition in Pairs of Two Assets
I'm having trouble understanding the intuition of a simple beta hedge using a linear regression.
Assuming an asset has a beta of 0.5 against the market. That implies for a percent move in the market, ...
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Price spread or ratio for mean reversion pair trading
I am slightly confused as to whether I should use price spread or ratio for mean reversion in pair trading. I have seen some work on testing stationarity for the price spread and then use the price ...
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Closed cycle of pairs in pairs trading
Suppose I am trading cointegrated pairs $A_1A_2, A_2A_3, \ldots A_{k-1}A_k, A_kA_1$ and I got a signal to
long $A_1$, short $A_2$;
long $A_2$, short $A_3$;
$\cdots$
long $A_k$, short $A_1$.
How ...
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Pairs trading stocks without shorting
For my high school national trading competition (organised by the national stock exchange, officially starting in a week) I gathered a team of 3 friends and developed a simple pairs trading strategy. ...
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Why does Theta in an OU process relate to a mispricing of a pair's spread
I am reading this article from Alex Lipton and Marcos Lopez de Prado: A closed-form solution for optimal mean-reverting trading strategies (2020) which talks about finding optimal profit taking and ...
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Stock clustering for Statistical Arbitrage Trading
Has ML based stock-clustering been practically adapted by the industry in arbitrage trading strategies like pairs trading for forming pairs instead of other traditional techniques like cointegration?
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Pairs trading back-test in python
I've been working on this code for weeks now, and I'm still not convinced by the results. I think there's a problem with the computation of the profit and loss, but I'm not sure. I would love some ...
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Separating Forex Instruments
I'm a mathematician and I'm newish to trading.
Is it possible to separate or decouple the two currencies in a trading pair?
That is, given the GBP/USD pair, is it possible to create a graph of the GBP ...
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Exit strategy on cointegrated pairs trading
I'm looking for guidance on an exit strategy when using pairs trading & cointegration. I'm able to find two cointegrated pairs, I then enter the trade however once in the trade I found the pairs ...
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Why long a position when the acutal price is higher than the predicted price? (Kalman filter for pairs trading)
In this paper Elliott, R., van der Hoek, J. and Malcolm, W. (2005) Pairs Trading., the spread (state process) is assumed to follow a mean reverting process $x_{k+1}-x_k=(a-bx_k)\tau+\sigma\sqrt{\tau}\...
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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 ...
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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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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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Pairs trading gradient [duplicate]
For a pairs trade, when calculating the zscore should I include the gradient (slope) from OLS in the calculation:
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Pairs trading intercept [duplicate]
For a pairs trade, when calculating the zscore should I include the intercept point in the calculation:
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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 ...
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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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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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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 ...
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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 ...
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What is the proper capital split/allocation between the long and short in a pairs trade?
I am trying to understand the following. If I have $100, how do I determine how much to allocate to the long and short of a pairs spread?
You might say "use the hedge ratio you calculate, as that ...
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Pairs trading using dynamic hedge ratio - how to tell if stationarity of spread is due to genuine cointegration or shifting of hedge ratio?
I'm very new to pairs trading, and am trying it out on a few dozen pairs.
It seems very natural to me to use a dynamic hedge ratio, as it seems likely that the ratio will move over time.
To accomplish ...
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Pairs Trading - isn't any spread stationary if your rolling lin-reg window is small enough?
I have a set of 7 assets, and I have run an ADF test on all possible pair-spreads to find possible pair strategies. I am creating the spreads using a rolling window in which I run linear regression to ...
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Pairs trading - is regression done on log prices or log returns?
I'm getting into pairs trading (statistical arbitrage), but I keep finding different instructions on how it's done.
Some sources (like this) run the linear regression (to find hedge ratio) on the log ...
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Simultaneous Stochastic Differential Equations
I was thinking about cointegrated time series and came up with the following simultaneous equations model:
$dY_t = \alpha (Y_t - \gamma X_t)dt + \sigma dB_t$
$dX_t = \beta (Y_t - \delta X_t)dt + \tau ...
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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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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 ...
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Pairs trading/Cointegration confusion
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 ...
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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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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 ...
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Pairs Trading Strategy Pre-Selection
I am writing paper on the profitability of the pairs trading strategy using US equities. I have done a pre-check to see which business sectors have stocks that are cointegrated. The utilities sector ...
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Pairs Trading (Cointegration Approach) - Daily Cointegration Test
I have a question regarding the Pairs Trading strategy based on the Cointegration Approach.
Most of the papers/literature I found on Pairs Trading using the Cointegration Approach are usually testing ...
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