PAIRS TRADING VIDYAMURTHY PDF

Main Pairs Trading: Quantitative Methods and Analysis Pairs Trading: Quantitative Methods and Analysis Ganapathy Vidyamurthy Comprised of three information-packed parts, Pairs Trading presents an in-depth look at the various aspects of these strategies and provides quantitative tools to assist in their analysis. The first part of this comprehensive resource sets the context for the rest of the book by introducing preliminary material on some key topics, including time series, factor models, and Kalman filtering. After presenting the broad ideas and concepts of this trading method, Pairs Trading delves into two different versions of pairs trading in the equity markets--statistical arbitrage pairs trading and risk arbitrage. Part II of this book details statistical arbitrage pairs trading, which is a relative value arbitrage on two securities based on the premise that there is a long-run equilibrium between the prices of the stocks comprising the pair. Part III moves on to illustrate the trading techniques and strategies associated with risk arbitrage--the widely practiced arbitrage technique that involves pairs trading arising in the context of corporate events, especially mergers and acquisitions. Written in a straightforward and accessible style, Pairs Trading provides a framework that will allow you to boost the bottom line of any portfolio.

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A pairs trade is a trading strategy that involves matching a long position with a short position in two stocks with a high correlation. The concept uses statistical and technical analysis to seek out potential market-neutral profits. Market-Neutral Arbitrage Market-neutral strategies are a key aspect of pairs of trade transactions.

Market-neutral strategies involve long and short positions in two different securities with a positive correlation. The two offsetting positions form the basis for a hedging strategy that seeks to benefit from either a positive or negative trend.

Pairs Trade Strategy A pairs trade strategy is based on the historical correlation of two securities. A pairs trade strategy is best deployed when a trader identifies a correlation discrepancy. Relying on the historical notion that the two securities will maintain a specified correlation, the pairs trade can be deployed when this correlation falters.

When pairs from the trade deviate, an investor would seek to take a dollar matched the long position in the underperforming security and sell short the outperforming security. If the securities return to their historical correlation, a profit is made from the convergence of the prices.

The net profit is the total gained from the two positions. One is that the pairs trade relies on a high statistical correlation between two securities. Most pairs trades will require a correlation of 0. Second, while historical trends can be accurate, past prices are not always indicative of future trends. Requiring only a correlation of 0.

Correlation Convergence To illustrate the potential profit, consider Stock A and Stock B, which have a high correlation of 0. The two stocks deviate from their historical trending correlation in the short term with a correlation of 0.

The arbitrage trader steps in to take a dollar matched the long position on underperforming Stock A with a short position on outperforming Stock B. The stocks converge returning to their 0. The trader profits from a long position and closed short position.

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Pairs Trade

A pairs trade is a trading strategy that involves matching a long position with a short position in two stocks with a high correlation. The concept uses statistical and technical analysis to seek out potential market-neutral profits. Market-Neutral Arbitrage Market-neutral strategies are a key aspect of pairs of trade transactions. Market-neutral strategies involve long and short positions in two different securities with a positive correlation. The two offsetting positions form the basis for a hedging strategy that seeks to benefit from either a positive or negative trend. Pairs Trade Strategy A pairs trade strategy is based on the historical correlation of two securities. A pairs trade strategy is best deployed when a trader identifies a correlation discrepancy.

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