Some Notes on the Formation of a Pair in Pairs Trading

José Pedro Ramos-Requena, Juan Trinidad-Segovia () and Miguel Ángel Sánchez-Granero
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José Pedro Ramos-Requena: Department of Economics and Business, University of Almería, Ctra. Sacramento s/n, La Cañada de San Urbano, 04120 Almería, Spain
Miguel Ángel Sánchez-Granero: Department of Matematics, University of Almería, Ctra. Sacramento s/n, La Cañada de San Urbano, 04120 Almería, Spain

Mathematics, 2020, vol. 8, issue 3, 1-17

Abstract: 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.

Keywords: pairs trading; hurst exponent; financial markets; long memory; co-movement; cointegration (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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