# 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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### 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 ...
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### 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 ...
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### 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 ...
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### 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,...
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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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 I ...
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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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