"04-2122_Trading_Strategies_lect

"04-2122_Trading_Strategies_lect - Advanced...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Click to edit Master subtitle style  1 Advanced Investment Strategies
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
 2 What is Pairs Trading? Pairs trading is one type of convergence trade § It identifies two stocks such that the historical prices move together (or, should move together) § If the stock’s prices diverge, pairs trading bets such diversion is temporary and eventually will reverse § By simultaneous longing the relatively “cheap” stocks and shorting relatively “expensive” stocks, pairs trading attempts to capture the L/S spreads Many forms of pairs trading based on the construction of pairs § Froot and Dabora (1999): Siamese twins shares § Getav, Goetzmann and Rouwenhorst (2006, hereafter GGR): 2
Image of page 2
 3 Pair Trading Based on Normalized Prices Two Step Procedure to Implement GGR’s algorithm § Estimation Stage ü Compute the differences between normalized stock prices over one-year horizons ü Identify pairs with the smallest normalized price differences as potential trading candidates § Implementation Stage ü
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern