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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### 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  of the paper. However, the weights used has a specification that I cannot ...
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### What are some ways to weight the basket of securities in high frequency setting?

I'm trying to build a basket of closely related assets $\{S_1, \dots, S_N\}$ that have no general index such as S&P500 and are represented in the high frequency setting. The general idea is to ...
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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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### How to calculate sharpe ratio for a strategy that has a stoploss and a profit exit condition?

I am working on a pair trading strategy, which either books a profit or holds the position till it hits stop loss over multiple days. I have months where I don't hit stop loss at all and this makes ...
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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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Could you tell me if the approach below for calculating the weights in a pairs trading strategy is correct? Let's say that my capital is 100. Regression $\ln(y)=b \ln(x) + e$. I find $b=1.2$. $w_{x}+... 0answers 51 views ### In Pairs Trading: How can high volatility in spreads be explained when there is a market shock? In my project I tested a Pairs trading strategy in the US equity market for data of 10 years. These 10 years include the financial crisis (2007-2008). The strategy follows a Cointegration approach. ... 0answers 54 views ### How can I find the weights for a pairs trading strategy I have found a python code for a pairs trading strategy and I cannot understand how it calculates the weights for the two stocks. It runs a regression log(y)~log(x) (without intercept). Then it takes ... 0answers 31 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 1answer 173 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 ... 0answers 112 views ### 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 ... 0answers 115 views ### 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 ... 1answer 176 views ### What should the look-back period be when calculating Cointegration? So I am confused as to what the look-back period should be when calculating Cointegration. By this I mean when running for example a Johansen or ADF test, should my look-back period be 6 months?... 1answer 88 views ### Should I calculate a spread using stock prices or the ratio? So I am creating a trading algorithm thats uses cointegration, for a pairs trading strategy. Imagine there is stock A for 100 dollars and stock B for 25 dollars. My questions is when caulcating the ... 0answers 60 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 / ... 1answer 198 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–... 1answer 164 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 ... 0answers 200 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 ... 1answer 192 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 - ... 1answer 47 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/... 1answer 217 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 ... 1answer 154 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 ... 0answers 62 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 ... 0answers 197 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,... 0answers 938 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 ...
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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+ ...
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### 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 ...
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