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Abstract
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Article Information:
Some Quantitative Issues in Pairs Trading
M.A. Alrasheedi and A.A. Al-Ghamedi
Corresponding Author: M. Alrasheedi
Submitted: October 30, 2012
Accepted: December 20, 2012
Published: February 21, 2013 |
Abstract:
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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.
Key words: Pairs trading, simulation, trading decision making, trends, vector auto-regressive model, ,
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Cite this Reference:
M.A. Alrasheedi and A.A. Al-Ghamedi, . Some Quantitative Issues in Pairs Trading. Research Journal of Applied Sciences, Engineering and Technology, (06): 2264-2269.
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ISSN (Online): 2040-7467
ISSN (Print): 2040-7459 |
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