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Optimal pairs trading strategies in a cointegration framework

Abstract : Statistical arbitrage is based on pairs trading of mean-reverting returns. We used cointegration approach and ECM-DCC-GARCH to construct 98 pairs of 152 stocks of 3 currencies. Stocks trading is done by Contract for Difference, a financial derivative product which facilitates short selling and provides a leverage up to 25 times. To measure the performance of a leveraged strategy, we introduced the profit factor which is the annualized return rate per unit risk. And the historical risk is measured by maximum drawdown. We compared three main strategies: percentage, standard deviation of cointegration long term residuals and Bollinger Bands (dynamic standard deviation), with and without double confirmation of short term standard deviation modeled by ECM-DCC-GARCH. Each of the three main strategies is optimized by two optimizers: absolute profit and profit factor. The optimization period goes from 2012-01-01 to 2014-12-31, and validation period is from 2015-01-01 to 2016-06-01. Our results showed that the USD Bollinger Bands strategy without double confirmation and optimized by profit factor, outperformed other strategies and provided the highest annualized return rate per unit risk.
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https://halshs.archives-ouvertes.fr/halshs-01566803
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Submitted on : Friday, July 21, 2017 - 12:05:55 PM
Last modification on : Tuesday, February 5, 2019 - 12:12:14 PM

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  • HAL Id : halshs-01566803, version 1

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Zhe Huang, Franck Martin. Optimal pairs trading strategies in a cointegration framework. 2017. ⟨halshs-01566803⟩

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