Pairs trading and outranking: The multi-step-ahead forecasting case

Nicolas Huck ()

European Journal of Operational Research, 2010, vol. 207, issue 3, 1702-1716

Abstract: Pairs trading is a popular speculation strategy. Several implementation methods are proposed in the literature: they can be based on a distance criterion or on co-integration. This article extends previous research in another direction: the combination of forecasting techniques (Neural Networks) and multi-criteria decision making methods (Electre III). The key contribution of this paper is the introduction of multi-step-ahead forecasts. It leads to major changes in the trading system and raises new empirical and methodological questions. The results of an application based on S&P 100 Index stocks are promising: this methodology could be a powerful tool for pairs selection in a highly non-linear environment.

Keywords: Finance; Pairs; trading; Multi-criteria; decision-aiding; Electre; III; Multi-step-ahead; forecasting (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (54)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:207:y:2010:i:3:p:1702-1716

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