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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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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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 \...
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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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4k 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, ...
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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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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 ...
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185 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 ...
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2k 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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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{\...
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43 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 ...
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795 views

main arbitrage & statistical arbitrage concepts

Can we please sumarise here some of the basic concepts, tools used in arbitrage and statistical arbitrage in real life? ARB: benefit from price difference on same asset ARB: difference between stock ...
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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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582 views

Need help on cointegration

I tried to test stock pairs for pairs trading. There are two questions I am not sure. I am not using ADF to test the log difference between two stocks. But I also see people using Johansen test. What'...
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174 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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4answers
162 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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134 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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595 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....
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How to build an execution trading system with CQG API?

I am currently using CQG for spread trading and have a spread trading strategy in CQG chart. I am trying to automate my spread trading strategy in CQG, but CQG told me to look at CQG API samples to ...
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162 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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How do different methods and techniques used in pairs trading compare?

I was going through the paper of Avellaneda (2008) on stat arb and I found it interesting that he uses asset returns vs. their respective ETFs to compute the s-score. I am wondering if anyone has ...
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586 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 ...
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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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455 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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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 ...
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How does pair trading work?

Explain pair trading to a layman. What is it, why would you want to do it, and what are the risks? Provide a real life example.
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168 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
883 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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3k 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 ...
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243 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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1k 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 ...
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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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How does Kalman filtering of beta in pairs trading model work in R?

Could anyone show how this could be done in R? The dlm package seems to be a good start, but I can't really find any good examples to learn from. Currently I have ...
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216 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 ...
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277 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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354 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 ...
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335 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 ...
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205 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 ...
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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 ...
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784 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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514 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 ...
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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, ...
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248 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 ...
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371 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 ...
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1answer
244 views

How to projectP&L or drawdowns on pair trading , trading and portfolios? [closed]

This is for planning and risk management. I am stuck on the following thoughts - Back-test the trading strategy for a period similar to the one you expect and then project. Do the above using ...
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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 ...
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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 ...
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702 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.
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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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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 ...