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Some Notes on the Formation of a Pair in Pairs Trading

2020; Multidisciplinary Digital Publishing Institute; Volume: 8; Issue: 3 Linguagem: Inglês

10.3390/math8030348

2227-7390

José Pedro Ramos-Requena, Juan Evangelista Trinidad Segovia, M.A. Sánchez-Granero,

Stock Market Forecasting Methods

The main goal of the paper is to introduce different models to calculate the amount of money that must be allocated to each stock in a statistical arbitrage technique known as pairs trading. The traditional allocation strategy is based on an equal weight methodology. However, we will show how, with an optimal allocation, the performance of pairs trading increases significantly. Four methodologies are proposed to set up the optimal allocation. These methodologies are based on distance, correlation, cointegration and Hurst exponent (mean reversion). It is showed that the new methodologies provide an improvement in the obtained results with respect to an equal weighted strategy.