The pairs trade or pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy. The pair trading was pioneered by Gerry Bamberger and later led by Nunzio Tartaglia’s quantitative group at Morgan Stanley in the 1980s.
What is ‘Pairs Trade’
The strategy of matching a long position with a short position in two stocks of the same sector. This creates a hedge against the sector and the overall market that the two stocks are in. The hedge created is essentially a bet that you are placing on the two stocks; the stock you are long in versus the stock you are short in.
Explaining ‘Pairs Trade’
It’s the ultimate strategy for stock pickers, because stock picking is all that counts. What the actual market does won’t matter (much). If the market or the sector moves in one direction or the other, the gain on the long stock is offset by a loss on the short.
Pairs Trade FAQ
How do you calculate terms of trade?
What is meant by terms of trade?
Is pairs trading still profitable?
How do you choose pairs for pairs trading?
How do you find a pair of trades?
What is pair trading strategy?
- Does simple pairs trading still work? – www.tandfonline.com [PDF]
- Pairs trading: Performance of a relative-value arbitrage rule – academic.oup.com [PDF]
- Pairs trading and selection methods: is cointegration superior? – www.tandfonline.com [PDF]
- The high sensitivity of pairs trading returns – www.tandfonline.com [PDF]
- The profitability of pairs trading strategies: distance, cointegration and copula methods – www.tandfonline.com [PDF]
- Pairs trading: does volatility timing matter? – www.tandfonline.com [PDF]
- Pairs trading in the UK equity market: Risk and return – www.tandfonline.com [PDF]
- Profitability of pairs trading strategy in an illiquid market with multiple share classes – www.sciencedirect.com [PDF]