Resumen de Pairs trading techniques: An empirical contrast
Mario Carrasco Blázquez, María del Carmen de la Orden de la Cruz, Camilo Prado Román
Pairs trading is one of the most commonly used market neutral strategies. Over the last few years, several hedge funds have used different ways to successfully implement this trading strategy. The most extensively used techniques (correlation, distance, stochastic, stochastic differential residual and cointegration) use different methodologies and statistical tools to determine the two key elements of the strategy: pairs selection and the establishment of the long-term relationship between them. The purpose of this paper is to analyze the process of selecting pairs and determining the residual series using each one of the different techniques and comparing the outputs. Results indicate that far from being differentiated systems, relationships exist between the various techniques in terms of pairs selection and residual series creation. However, some techniques are more efficient at creating residual series than others, which then means that these techniques would have the highest probabilities of generating profits. The analysis concludes that cointegration is the most efficient method of structuring a pairs trading strategy.
