Pairs Trading: Quantitative Methods and Analysis
The first in-depth analysis of pairs trading
Pairs trading is a market-neutral strategy in its most simple form. The strategy involves being long (or bullish) one asset and short (or bearish) another. If properly performed, the investor will gain if the market rises or falls. Pairs Trading reveals the secrets of this rigorous quantitative analysis program to provide individuals and investment houses with the tools they need to successfully implement and profit from this proven trading methodology. Pairs Trading contains specific and tested formulas for identifying and investing in pairs, and answers important questions such as what ratio should be used to construct the pairs properly.
Ganapathy Vidyamurthy (Stamford, CT) is currently a quantitative software analyst and developer at a major New York City hedge fund.
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apply approach arbitrage pairs arbitrage pricing theory arbitrageur ARMA model asset assumption average beta bidder stock Brownian motion calculated CAPM cash chapter cointegration coefficient common factor returns common trends model construct correlation cost function covariance matrix deal break differencing discussion distance measure equilibrium value estimate evaluate exchange ratio execution expect factor covariance matrix factor models Fibonacci Figure formula given idea innovation sequences involved Kalman filter linear combination linear relationship logarithm mean merger nonstationary normal distribution Note pairs trading parameters plot prediction pricing period profit random walk regression risk arbitrage sample securities short position short selling specific returns specific variance spread dynamics spread position spread series spread value statistical arbitrage step stock price strategy target shares target stock theory tracking basket tracking error tradable typically value at risk variables volatility VWAP white noise realizations white noise series zero zero-crossing zero-crossing rate