Copula-Based Pairs Trading Strategy

Posted: 31 Jan 2013 Last revised: 17 Jun 2015

See all articles by Wenjun Xie

Wenjun Xie

Nanyang Technological University (NTU) - Division of Banking & Finance

Yuan Wu

Nanyang Technological University (NTU) - Division of Banking & Finance

Date Written: January 30, 2013

Abstract

Pairs trading is a technique that is widely used in the financial industry and its profitability has been constantly documented for various markets under different time periods. The two most commonly used methods in pairs trading are distance method and co-integration method. In this paper, we propose an alternative approach for pairs trading using copula technique. The proposed method can capture the dependency structure of co-movement between the stocks and is more robust and accurate. Distance method and co-integration method can be generalized as special cases of the proposed copula method under certain dependency structure.

Keywords: pairs trading, copula, dependency, trading strategy

JEL Classification: C13, C53, C61, G10

Suggested Citation

Xie, Wenjun and Wu, Yuan, Copula-Based Pairs Trading Strategy (January 30, 2013). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2209209 or http://dx.doi.org/10.2139/ssrn.2209209

Wenjun Xie (Contact Author)

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

Yuan Wu

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

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