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2013 (Vol. 5, Issue: 06)
Article Information:

Some Quantitative Issues in Pairs Trading

M.A. Alrasheedi and A.A. Al-Ghamedi
Corresponding Author:  M. Alrasheedi 

Key words:  Pairs trading, simulation, trading decision making, trends, vector auto-regressive model, ,
Vol. 5 , (06): 2264-2269
Submitted Accepted Published
October 30, 2012 December 20, 2012 February 21, 2013
Abstract:

In this study, Pairs Trading (PT) is considered. An example of its application using real data is shown and a time series simulation of the Saudi stock market using the Vector Auto-Regressive model (VAR) is performed on two stocks. In addition, the influence of different simulation model parameters on the total profit is investigated. We conducted a quantitative analysis of different cross-correlations that occurred between simulated stocks, as well as of different values of linear trends in the auto-regressive model. Furthermore, the optimal conditions for the application of a PT strategy, as well as the optimal parameters used for this strategy were obtained. It was shown that parallel trends and a high correlation between considered stocks can lead to significant profits. In the case of highly correlated series with limited volatility, benchmarks should be used for opening and closing positions.
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  Cite this Reference:
M.A. Alrasheedi and A.A. Al-Ghamedi, 2013. Some Quantitative Issues in Pairs Trading.  Research Journal of Applied Sciences, Engineering and Technology, 5(06): 2264-2269.
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ISSN (Online):  2040-7467
ISSN (Print):   2040-7459
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