Pairs Trading Strategies Based on Co-integration Theory and OU Stochastic Process

›› 2017, Vol. 29 ›› Issue (9): 28-36.

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Pairs Trading Strategies Based on Co-integration Theory and OU Stochastic Process

Liu Yonghui, Zhang Di

School of Statistics and Information, Shanghai University of International Business and Economics, Shanghai 201620

Received:2015-09-06 Online:2017-09-28 Published:2017-10-09

Abstract

Abstract:

Pairs trading is a type of risk-neutral quantitative strategy. By analyzing the pairs trading principal and observing the actual market data, this paper proposes a new type of execution methods for pairs trading strategy based on the work carried out by Bertram(2010). Using the out-of-sample data to simulate real trading and demonstrate the pros and cons of different methods, we find that the trading strategy based on co-integration theory and OU stochastic process has a better returns expectation given the same risk exposure and the result of the strategy is solid.

Key words: pairs trading, co-integration, OU process, quantitative strategy

Liu Yonghui, Zhang Di. Pairs Trading Strategies Based on Co-integration Theory and OU Stochastic Process[J]. , 2017, 29(9): 28-36.

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Pairs Trading Strategies Based on Co-integration Theory and OU Stochastic Process

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