Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
8954570 | Finance Research Letters | 2018 | 33 Pages |
Abstract
Pairs trading can be regarded as conditional mean reversion strategies. The conditions are usually imposed in two stages: Identification of pairs' relationship and the opening (and closing) mechanism sequentially as a 'pass or fail' test. Nevertheless, as cointegration relationship is often not a 'yes or no' question but a 'strong or weak' one, dichotomizing the relationship through screening may not be optimal. This research presents a new single-stage approach to pairs trading based on a single 'power statistic'. Its superiority in attaining better risk-to-reward ratios is demonstrated empirically in a large scale backtest study.1
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
K.F. Law, W.K. Li, Philip L.H. Yu,