BibTeX
@MISC{Xie14pairstrading,
author = {Wenjun Xie and Rong Qi Liew and Yuan Wu and Xi Zou},
title = {Pairs Trading with Copulas},
year = {2014}
}
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Abstract
Pairs trading is a well-acknowledged speculative investment strategy, with the distance method the most commonly implemented such strategy. However, this approach, is able to fully describe the dependency structure between stocks only under the assumption of multivariate normal returns. In this research, we propose a new pairs trading strategy to generalize the conventional pairs trading strategy by using the copula modeling technique. Copulas allow separate estimation of the marginal distributions of stock returns and their joint dependency structure, and thus can provide sound estimation of the true joint distribution between stock returns. The overall empirical results verify the proposed strategy’s ability to generate higher profits compared with the conventional distance method.
Keyphrases
stock return copula allow separate estimation multivariate normal return copula modeling technique new pair trading strategy conventional distance method true joint distribution marginal distribution sound estimation pair trading overall empirical result dependency structure conventional pair trading strategy joint dependency structure well-acknowledged speculative investment strategy
