39 Pages Posted: 25 Apr 2010 Last revised: 12 Jan 2012
Date Written: April 22, 2010
In this paper we outline two previously suggested methods for quantitative motivated trading in pairs. We focus on the method of cointegration and an unobserved mean reversion model called the stochastic spread model. The methods are used to implement a search procedure that aims to reveal profitable pairs among all possible pairs available on the German, French and Dutch stock exchanges. The intended user of this application is the trading desk at Amsterdams Effektenkantoor for which this investigation has been done. Implementation details are found at http://files.meetup.com/1704326/PairsTrading.ppt.
Keywords: pairs trading, mean reversion, implementation, kalman filter, VAR
Suggested Citation: Suggested Citation
By Meb Faber