Evaluation of Pairs Trading Strategy Using Distance Approach at Tehran Stock Exchange

Subject Areas : Journal of Investment Knowledge

Masood Tadi ¹ , Majid Abkar ² , Vahid Motaharinia ³

1 - MSc of financial engineering, University of Tehran
2 - MSc of financial management, Allameh Tabataba'i University
3 - MSc of financial engineering, University of Tehran

Received: 2017-04-07 Accepted : 2017-06-18 Published : 2018-06-22

Keywords: Algorithmic trading, Pairs trading strategy, Distance approach, Arbitrage opportunity, Buy and Hold Strategy, Stock Selection,

Abstract :

Algorithmic trading has become one of the main strategies in financial industry. This kind of trading involves trading strategies based on computer programs to decide whether to send their orders. Pairs trading strategy is one of the most popular and however, most understandable strategies in algorithmic trading. To implement a pairs trading strategy we can utilize several approaches or a combination of them. In this paper the distance approach has been considered. In this approach the two stocks that have least square distance between their normalized prices are being chosen for pairs trading. In this study, in order to implement this strategy, shares pair of metallic ores mining industry and price data in the year of 1395 have been selected. The strategies and the test, performance test trading strategies buy and hold strategy compared. In this paper all of stocks are selected from mining of metal ore industry during the first 9 months of the 1392 SH. Finally, the performance of pairs trading strategy is compared with buy and hold strategy and after that the favorable range of threshold and optimum threshold size is calculated.   

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