What is pairs trading?
Pair trade (Pairs Trading) refers to a market-neutral investment strategy the mid-eighties known Wall Street investment bank Morgan Stanley trader Nunzio Tartaglia number of the establishment of a number of proposed ,, analysis team whose members are mainly physicists, mathematicians , and computer scientists.
Ganapathy Vidyamurthy in: Pairing the definition of a book "Pairs Trading Quantitative Methods and Analysis" transactions of two types: one is based on statistical arbitrage pairs trading, one is based on risk arbitrage pairs trading.
Pairs trading principles
The two strategies monitor the performance history of the underlying securities. When the correlation between the two securities temporarily weakened, that a stock moves up while the other stocks move down, short on currency transactions would shorten the excellent performance of the stock and do more than the poor performance of the stock, and that two "difference" between those ultimate convergence. A disagreement on the stock price may be due to temporary changes in supply and demand, a large single-stock transaction, there is a major company news and so on.
Due to the use of short-term pair trade mispricing between the pair, by holding relatively undervalued, overvalued relative short sale, so it is essentially a reversal investment strategy, the core of the academic literature stock price mean reversion. Although the pair trading strategy is very simple, but it is widely used, mainly because its reason can be widely applied: First, earnings and market paired transaction is separate from that market-neutral, meaning that it increases the market or nothing to fall; Secondly, the volatility of its earnings is relatively small; third, their income is relatively stable.
Features pairs trading
First, use a short pairs trading price deviation from the symmetry of two assets, hedging for Alpha returns two assets, the core assumption is spread paired with a mean reversion of assets. And this is irrational behavior of mean reversion traders related. Because when traders there are a lot of these ideas in the market, the stock price will have to rise inertia, but this increase simply because this irrational factors inertia driven, and there is no specific practical fundamentals support, so the stock is It will soon fall. In contrast, the stock fell down also have inertia, when the rational factors dominate the market, prices will revert to its original level. If traders can employ pairs trading strategy, you can get these two asset prices deviate from the proceeds. In practice, its execution can be simply described as: investors first select two assets matched to each other, when the price difference between paired assets increases, the assets do more than low prices, while short of the high asset prices, and when the price difference is reduced, the end position, to complete the transaction; the same time, in order to control the risks, when spreads further expand, the need to end position at the appropriate stops.
Second, pairs trading is a market neutral trading strategies. When the observed differences in asset prices paired increases to a certain extent, to establish short of rising asset prices, establish long for prices of assets. Under the action of a LOOP, the pairing asset price difference will be quickly reduced. At this time, then buy a previously established short positions to hedge asset price declines, while selling prices of assets, access to two income assets. On the whole process, the transaction has a pair of systemic risk and individual risk in a single asset, but the position is always opposite, so the system is fully hedged risk, the overall risk of pairing only assume the individual assets of pairs trading. And in the law of one price, the price for the return value of making individual risk assets pairing directly converted into individual income. This income is irrelevant to the market.
Pairs trading strategy requires a good position size, market timing and decision-making skills. Although this strategy is not much downside risk, but trading opportunities are few and, in order to profit, the trader must be "the first to start with the people", which requires powerful hardware and programming capabilities.
Empirical pairs trading
Let's look at a pair of A-share market more common pairing stock: Midea Group (000333), Gree Electric Appliances (000 651)
2014-01-01 to 2018-01-01 time, a period of time intermediate Gree suspended, the missing data.
After calculation, both the correlation coefficient of 98.73%, we can say the correlation is very high, which is why the two are often used for pairs trading.
Instead, both on the big trend is upward, lengthening the time period will result in improved correlation between the two, we will look at the last year of both relevance.
In the short term, is still very high correlation between the two, the correlation coefficient reached 94.18%
In addition, we are looking for a pair of anti Example: SAIC (600104), Guangzhou Automobile Group (601238)
Long period, although the two stocks are for the automotive sector, but the correlation coefficient is only 76.52%
In the short term, both the lower correlation, the correlation coefficient of only 56.76%
Next, we look at the general idea of pairs trading strategy is like.
The following test parameters are set to return:
Time: 2015-01-01 to 2018-08-01
transfer positions Frequency: one day
benchmark index: the Shanghai and Shenzhen three hundred index (SHSE.000300)
subject: Midea (000333) Gree Electric Appliances (000 651)
slippage: 0.0001
fee : 0.0001
Strategy thinking:
1, to obtain two stocks trading case, if the suspension is skipped.
2, calculated on the 4th, two closing spread value, and calculates the variance and the mean difference.
3, based on the above data, the difference Bollinger configuration.
4, when the upper rail break Brin spreads, spreads short (half cartridge).
5, when the lower rail break Brin spread, spread to do more (half cartridge).
We see the strategy and achieved good earnings stability, is more difficult because the A-share short, here only do more stock, not short the stock of the operation. Strategies considered a semi-finished bar, can be seen in the pursuit of stability, we sacrificed more benefits, for example, in a bull market, we do not go beyond the broader market. There are many pairs trading strategy ideas, here are for reference only, our readers laughed.
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