Category:Pairs Trading

Pairs trading is the kind of statistical arbitrage where trader finds two or more assets somehow related (economically, mathematically) to each other, thus they are cointegrated, at least in the short term. Then synthetic security is built from the chosen assets so that its price is stationary (again, at least in the short term), such that one may trade mean-reversion of it. For this purpose, one security is usually bought long and other(s) is sold short. Thus, pairs trading may be considered a special type of mean reversion strategy.

Pairs trading may be done in several asset classes (equity, futures, ETFs) and there are different approaches of pairs selection and construction (see the papers section below).